Of BITs, Demons and Tremors: Foreign Investment in Ecuador

By Camilo Muriel Bedoya, Associate at Pérez Bustamante & Ponce in Ecuador

I. Aftershocks

What do bilateral investment treaties (BITs), international investment law, and an earthquake have in common? Politics. Law and politics, to be more accurate, and there is a fine boundary line between them.

Last April, Ecuador faced a devastating natural disaster, a 7.8-magnitude earthquake. It took hundreds of lives, the peace of mind of Ecuadorians, and important material losses. Unfortunately – though curiously – the earthquake also revealed a deeper non-natural disaster: a political aftershock.

The earthquake inopportunely came just in time after months of depressed oil prices, volcano-alerts, and political uncertainty. It found an already cracked economy and a hesitant executive power, as its immediate re-election depends on a constitutional amendment. The earthquake, hence, exposed a weakened government, but it also revealed a firm civil society.

After the earthquake, many questions arose regarding the management of resources derived from the high oil prices of the past years. Recently, the fear of an empty-vaulted economy became real when President Rafael Correa passed a “Solidarity Law” (in force since May 2016) and solidarity contributions (i.e. taxes) were implemented.

Against this backdrop, it is unquestionable that funds are needed to rebuild the country. Certainly, foreign investment could represent the urgent capital injection for Ecuador’s economy. However, here is where years of propaganda against BITs and international investment law may backlash.

II. BITs and Demons

Years ago, President Correa promised to end the long neoliberal night, and his administration has followed this line of thought. Institutions such as the International Monetary Fund, the World Bank and the International Centre for Settlement of Investment Disputes (ICSID) were demonized, and important reforms were introduced when Ecuador’s new Constitution entered into force on 20 October 2008.

The Ecuadorian Constitution expressly recognizes international law as part of its legal framework, yet it currently prevents the execution of international instruments whereby Ecuador grants jurisdiction to international arbitration forums, unless these relate to disputes between States and citizens in Latin America. Remarkably, the constitutional limitation only mentions treaties or international instruments that deal with contractual or commercial disputes, which do not necessarily involve violations of international investment law.

Thus, the demonization campaign continued. The new Constitution aimed to close the doors to international arbitration and, particularly, to investment arbitration. Accordingly, it did not take long until Ecuador denounced the ICSID Convention in 2009 and encouraged the creation of an alternative international arbitration center within the Union of South American Nations (UNASUR). In the present, the member States of UNASUR include Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Suriname, Uruguay, and Venezuela.

Dispute resolution has become a key element in foreign investment and it is reasonable to understand why investors seek a neutral system for adjudication. Therefore, favoritisms are not desirable at all, regardless of the party involved. It is uncertain whether the UNASUR arbitration center will succeed, especially if it is tainted with the very same criticism made against ICSID, a perceived bias.

As noted by Professor Blackaby, withdrawing from ICSID is a “storm in a teacup” unless all BITs are denounced and their survival clauses cease to apply*.  The ultimate goal of the Ecuadorian Constitution was not achieved, given that there are other forums and mechanisms available in order to access to international arbitration. Hence, termination proceedings were started against the BITs still in force.

III. All BITs are Equal, but Some BITs are More Equal Than Others

Interestingly, Ecuador took a very animal-farm-esque approach towards termination of its BITs. It looks like Ecuador’s position is that all BITs are equal, but some BITs are more equal than others. In other less-Orwellian terms, internal proceedings for terminations were started, but some reached further stages than others, without apparent reason.

The BITs executed with Argentina, Bolivia, Canada, Chile, China, France, Germany, Italy, the Netherlands, Peru, Spain, Sweden, Switzerland, the United Kingdom, the United States, and Venezuela are still in force and termination proceedings have not continued. Still, despite that no further actions have followed since 2014, the Ecuadorian National Assembly approved the termination of the BITs executed with Finland, France, Germany, Sweden and the United Kingdom, being the Ecuador-Finland BIT the only case where notification of termination was ordered.

Also, in 2013 President Correa created a special commission, CAITISA. The Commission’s purpose is to audit the Ecuadorian BITs and evaluate the international investment arbitration system. The final report is not public – and it is uncertain whether it is going to be – although its conclusions are foreseeable, especially as it is sensible to conclude that the Commission closely follows the work of its members (e.g. that the decisions rendered by arbitral tribunals against Ecuador are illegitimate and unjust, that international investment law is unfair, that big corporations are the only privileged by the system, etc.).

Nonetheless, Ecuador might have realized the consequences of its actions, especially before the eyes of the international community. For example, a bill on incentives for public-private partnerships and foreign investment entered into force in December 2015. And, more importantly, the approval of a trade agreement with the European Union is pending and the negotiations for a trade agreement with South Korea are still in progress. Surely, any politicized report stating how evil foreign corporations are or how capital-exporting countries bully capital-importing countries could jeopardize the future of any trade agreement.

International investment law faces many challenges, yet its harmony and uniformity will be achieved with time. Similarly, political risks may always be present, but disregarding a system because of an adverse resolution derived from actions that led to that decision is certainly not the answer. Moreover, governments should start by exorcising their own demons, such as corruption.

IV. Conclusion

How does a country make itself attractive to investors? Certainly not with aggressive tax policies, politicized courts, or interventionism. Foreign investment is attracted by appropriate incentives, which at least embrace legal certainty, efficiency, and political and economic stability.

Indeed, the international investment regime has flaws, yet the answer is not closing the doors to it. International law of foreign investment will evolve with or without a particular country and its weaknesses remain to be overcome. BITs give specific guarantees to investors, and governments should be part of their development. Likewise, foreign investors must respect the law of the host countries, but there are also international standards that must be met by both the investors and the host States, and not just bits of them.

*See N. Blackaby, “ICSID Withdrawal: a Storm in a Teacup?”, (2010), Cahiers de l’Arbitrage, p. 45.