Ecuador Moves Closer To Its Withdrawal From World Bank Arbitration

On May 30, 2009, Ecuadorian President Rafael Correa announced that his country would be withdrawing from the International Centre for Settlement of Investment Disputes ("ICSID"), based at the World Bank in Washington, D.C. The move comes on the heels of Ecuador's approval of a new constitution in September 2008, which forbids the country from submitting to arbitration outside of Latin America. In accordance with that constitutional edict, Ecuador's Congress voted on June 12, 2009 to denounce ICSID's arbitration facility. Ecuador would be only the second country, after Bolivia, to withdraw from ICSID.

Per Article 71 of the ICSID Convention, Ecuador's denunciation will be complete six months after formal notification is received by the World Bank. In addition to its withdrawal from ICSID, Ecuador has also terminated nine separate bilateral investment treaties ("BITs"), mostly involving other developing countries in the region, because they have not produced the desired level of foreign investment. The country is also rumored to be working on a model BIT, which would limit dispute resolution proceedings to regional fora.

Most scholars and legal practitioners agree that companies currently invested in Ecuador pursuant to contracts with ICSID-based dispute resolution clauses will likely not be affected by Ecuador's decision. That is because Article 72 of the ICSID Convention provides that notice pursuant to Article 71 will not affect rights and obligations that arose prior to the issuance of the notice. Likewise, the withdrawal will probably not disturb ICSID provisions in existing bilateral investment treaties, as governments cannot use domestic legislation to avoid compliance with obligations made under international law. Perhaps seeking to fend off a flurry of filings, however, President Correa announced on June 20 that the government will expel oil companies that initiate claims against Ecuador. Whether this policy will be extended to other industries remains to be seen. President Correa also announced that on June 24 Ecuador will be joining the Bolivarian Alternative for the Americas ("ALBA"), which, he said, will allow the country to join with other nations in confronting international arbitration processes. ALBA was formed in 2004 and counts Cuba, Bolivia, Honduras, Nicaragua and various smaller Caribbean nations as its other members.

The issues outlined above remain untested under international law. Therefore, it is imperative for those companies with operations and investments in Ecuador, and especially those with potential claims that have not yet been articulated or formalized, to seek prompt and comprehensive legal advice from international investment arbitration experts about the most appropriate method of protecting their rights in the face of Ecuador's recent actions. In addition, because withdrawal from ICSID will not take effect until six months after receipt of notice by the World Bank, investors potentially affected by Ecuador's action should also take urgent precautionary steps. These may include:

• "Perfecting" Ecuador's consent to ICSID jurisdiction, on the theory that the country gave its consent to ICSID upon joining, and remains an ICSID signatory until its denunciation takes effect. This step may be accomplished by simply submitting a letter to the government accepting its general consent to ICSID jurisdiction. While this action is prudent, it remains uncertain whether a properly-constituted ICSID tribunal will rule that it has jurisdiction over a denouncing country.
• Where possible, transferring the affected investments to an affiliate(s) in a country that has a BIT with Ecuador and offers an effective dispute resolution mechanism.
• Taking a close look at the company's political risk insurance coverage.