Ecuador in particular has seen a barrage of lawsuits from foreign energy companies who object to a 2006 law which imposed a 99% windfall levy on ‘excess revenues’. Foreign energy companies allege that this levy clashes with long-standing contracts, as well as investment protection treaties signed by home countries with Ecuador.
A handful of arbitration panels at the International Centre for the Settlement of Investment Disputes (ICSID) are now hearing these claims. In the interim, companies are asking arbitrators to order Ecuador to refrain from collecting the disputed taxes – at least until the arbitrations run their course.
Ecuador has reacted angrily to such requests – pointing to its sovereign right to tax, and the capacity of arbitrators to penalise the government at a later date, should they see fit. However, arbitrators are not content to sit on their hands while these disputes run their course.
Recently, an ICSID tribunal ordered Ecuador to refrain from demanding payment of windfall taxes allegedly owed by a French oil company, Perenco, which along with the US’s Burlington Resources, carries out oil exploration and production in Ecuador’s Amazon region. Instead, arbitrators have demanded that the contested levies be paid into an escrow fund – to be remitted to the winning party at the conclusion of the arbitration.
A separate tribunal in the Burlington case is expected to rule soon on a similar interim measures request by the US investor.
The May 2009 interim order is the latest in a series of moves by international arbitrators aimed at deterring sovereign states from taking actions which might aggravate matters that are before dispute panels.
However, it remains to be seen whether states will comply with such orders. Unlike courts, which can, for example, hold parties in contempt of court, arbitrators lack the power to enforce interim orders.
And in the Perenco dispute, Ecuador’s state oil company, Petroecuador, has recently tried to auction seized quantities of Perenco’s oil production in an effort to settle the French company’s tax bill. At the time of writing, Petroecuador had found no bidders.
Nevertheless, the state oil company’s apparent flouting of the arbitration tribunal’s order has led to much discussion among business lawyers and government officials.
Some government officials are annoyed that arbitration panels would even try to restrain their sphere of action while disputes are being arbitrated. However, some arbitration lawyers express grave concern when states do not comply with interim orders such as the one issued in the Perenco case.
Stanimir Alexandrov, a partner in the Washington, DC, office of the law firm Sidley Austin, sees a “serious risk to the system” of arbitration when governments ignore rulings such as those seen in the Perenco case.
With similar orders likely to arise in future cases, it remains to be seen whether Ecuador (and other governments) will agree to abide by such rulings – or whether the authority of arbitrators will come into further question.
At the time of going to press, Ecuadorian president Rafael Correa was threatening to pull his country out of ICSID altogether. If that comes to pass, Ecuador will become the second South American country (after Bolivia) to withdraw in a huff from the World Bank’s arbitration facility in recent years.
Luke Peterson is the editor of Investment Arbitration Reporter (www.iareporter.com), a legal news, analysis and intelligence service.