ICSID - ECUADOR TO WITHDRAW FROM WORLD BANK'S ARBITRATION

C O N F I D E N T I A L QUITO 000464

SIPDIS

USTR FOR BENNETT HARMAN
USDOC 4332/MGAISFORD

E.O. 12958: DECL 06/17/2019
TAGS: ECON EINV PREL EC
SUBJECT: ICSID - ECUADOR TO WITHDRAW FROM WORLD BANK'S ARBITRATION
FORUM

REFTEL A: 08 Quito 984
B: 07 Quito 2382

Classified by: DCM Andrew Chritton, Reasons 1.4 (b) and (d).


1. (U) Summary: On May 30, President Correa stated that Ecuador
would withdraw from the World Bank's investment dispute arbitration
forum (ICSID) because it violated Ecuador's new constitution, which
only permits the use of regional arbitral forums. Current ICSID
cases would still be honored. Ecuador's legislative body approved
Correa's request to withdraw from ICSID on June 12; we are not aware
that the GOE has officially notified ICSID to date. The U.S.-Ecuador
BIT provides other arbitration options for U.S. investors. End
Summary.


2. (U) In his May 30 radio address, President Correa stated that
Ecuador was planning to withdraw from the World Bank's investment
dispute arbitration forum, the International Centre for the
Settlement of Investment Disputes (ICSID). Calling ICSID "an
atrocity," he said that withdrawal was necessary for "the liberation
of our countries because this [ICSID] signifies colonialism; slavery
with respect to transnationals, with respect to Washington, with
respect to the World Bank, and we cannot tolerate this." In
addition, Correa stated that he would promote an initiative among the
Union of South American Nations (UNASUR) to abandon ICSID. He
stated, however, that existing arbitration cases under ICSID would be
honored.


3. (SBU) On June 5, Correa submitted a request to the Ecuadorian
legislative body to approve withdrawal from ICSID, based on an
article in the new constitution that requires approval by the
National Assembly before ratifying or denouncing international
treaties. Correa's argument was that the ICSID convention violated
Article 422 of the new constitution, which forbid Ecuador from
entering into treaties that granted jurisdiction to international
arbitration bodies, except for regional arbitration bodies (reftel
A). (Note: MFA officials had told us that this provision would not
be applied retroactively and that our Bilateral Investment Treaty
(BIT) remained in force; according to these officials, the
constitutional provision would apply to new treaties.) On June 12,
the legislative body, which is overwhelmingly controlled by Correa's
movement, approved Correa's request to withdraw from ICSID. The head
of the Assembly commented that Ecuador needed to "reclaim its
sovereignty."


4. (U) For the move to become effective, the GOE still needs to
officially notify ICSID that it is withdrawing, and withdrawal would
be effective six months later. Parties would still have the ability
to bring cases against Ecuador during this time.


5. (SBU) Correa's government has questioned the impartiality of
ICSID on several occasions, claiming the forum rules in favor of
multinational companies over nation states, in spite of evidence that
in general ICSID has ruled in favor of states more often than
investors. In late 2007, Ecuador's Foreign Minister notified ICSID
that it would no longer consent to ICSID jurisdiction for future
natural resources cases (reftel B). ICSID has been the arbitral
forum of choice for companies seeking redress in investment disputes
with the GOE in the all-important petroleum sector. The Ecuadorian
press reports that six of Ecuador's 10 current arbitration cases are
being handled through ICSID, with total claims of $3.9 billion.
Recently, oil companies have negotiated new contracts with the GOE in
which they agreed to non-ICSID arbitration forums such as using
internationally agreed rules with the hearing taking place in Chile,
or the International Chamber of Commerce in Paris. However, most
foreign oil companies operating in Ecuador have outstanding
arbitration cases filed with ICSID challenging the windfall oil
income tax of 2006, which they claim constituted a change to the
economic conditions of their contracts.


6. (C) Ecuador is a party to more than a dozen BITs, many of which
provide for ICSID arbitration. The U.S. BIT provides for other
arbitration options, including ICSID Additional Facility rules, the
U.N. Commission on International Trade Law (UNCITRAL),or other
forums as agreed to by the parties. ICSID's Additional Facility
Rules authorize its Secretariat to administer arbitration proceedings
in cases when one of the parties is not a member of ICSID. Some
countries, however, only provide for ICSID arbitration in their BITs
with Ecuador, such as France, Chile, and Peru. The French Commercial
Attache is very concerned about this, and is afraid the GOE will
subsequently pronounce the French BIT invalid and request that France
negotiate a new BIT, based on a new Ecuadorian model.


7. (SBU) When asked about the decision immediately following Correa's
announcement, contacts in the Solicitor General's office (which is
responsible for defending the GOE in international arbitration cases)
indicated they knew nothing of the decision. The Foreign Ministry
has been hesitant to discuss the issue, and it appears government
officials in general have been waiting for presidential guidance
before making public statements. Oil companies to date do not appear
to be significantly troubled by the statement, probably because their
new contracts already provide for non-ICSID arbitration and most
already have pending cases in ICSID over past disputes. However,
other investors that might have been considering investing in Ecuador
will likely have second thoughts given this development.


8. (C) Comment: Correa's move to withdraw from ICSID appears to be
ideological, and aimed largely at that one institution. He has
consistently criticized ICSID, probably in large part because it is
affiliated with the World Bank, but has been silent on other
international arbitration fora, such as UNCITRAL, and agreed to
include international arbitration provisions in new contracts signed
by the government, albeit with certain restrictions. Existing
investors with disputes in Ecuador have already availed themselves of
the ICSID forum, so the withdrawal does not obviate any liabilities
from those disputes. End Comment.

HODGES