• The Republic of Ecuador was handed a legal victory in late February when an arbitration tribunal dismissed an $80m claim by Canada’s Encana Corporation. Ecuador has been dogged by disputes with several foreign oil and gas companies relating to VAT refunds. The companies insist that they are entitled to VAT refunds on goods and services purchased to support their exploration and production activities in Ecuador. When Ecuador’s tax authorities baulked, Encana accused the government of breaching commitments in an investment protection treaty between the countries.

    Unfortunately for Encana, many of the treaty’s provisions do not apply to disputes over tax matters, and it was unable to convince the tribunal that its losses were so severe as to be construed as an “expropriation” under the treaty. It can challenge the arbitration ruling by turning to the English courts, where the arbitration tribunal was headquartered. However, a spokesperson indicated that the company will not be pursuing the matter.

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    After the arbitration award was handed down, Encana sold its oil and pipeline interests in Ecuador to a consortium of Chinese producers.

 

  • Ecuador has been less successful so far in a separate legal fight with US-based Occidental Exploration and Petroleum Company. Occidental also claimed VAT refunds but proved more successful in convincing an arbitration tribunal of its rights: in July 2004, the tribunal ruled that Ecuador had breached provisions of its investment protection treaty with the US.

    The US-Ecuador treaty offers different legal protections than those found in the Canada-Ecuador treaty, thus the arbitration tribunal ruled against Ecuador in its case with Occidental. The tribunal ordered Ecuador to pay Occidental more than $75m, but Ecuador sought a temporary reprieve by challenging the arbitral ruling in the English courts. However, in a ruling handed down in March, Justice Aikens of the High Court rejected Ecuador’s argument that the tribunal had exceeded its powers during its arbitration of the dispute. Ecuador’s legal team says that the government will seek leave to appeal the High Court ruling before a higher court.

 

  • Disputes under international investment protection treaties – such as those mounted by Occidental and Encana against Ecuador – continue to gather pace globally. In November 2005, the United Nations Conference on Trade and Development asked me to tally the numbers. While the results provided only a partial picture (with an unclear proportion of these cases flying below the radar), it soon became clear that foreign investors are no longer shy about turning to investment protection treaties in case of a major blow-out with their host government. In 2005, at least 42 investment treaty arbitrations were launched by foreign investors against their host governments. These cases ran the gamut from a $500m claim brought by two Turkish telecoms firms against the government of Kazakhstan, to a $50m claim brought against Lithuania by a Norwegian investor in a public parking concession.

    Perhaps more notable, 2005 marked the third year in a row when the number of new investment treaty arbitrations exceeded 40. Putting it into context, more than two-thirds of all cases where foreign investors pursue arbitration under one of these international treaties have been initiated since the beginning of 2002.

    A decade ago, such claims were exceedingly rare; today they have become the preferred means of resolving major foreign investment disputes. At the last count, more than 60 governments had faced at least one arbitration under an investment protection treaty. The actual number could be considerably higher given the lack of any requirement for states (or investors) to advertise their involvement in such legal disputes.

    The sums involved are in these arbitrations are also becoming noteworthy. Shareholders in the embattled Yukos Corporation are suing Russia for more than $30bn in a series of ongoing arbitrations. While this claim dwarfs all others, arbitrations for hundreds of millions – and even billions – of dollars are becoming increasingly commonplace.

     

 

Luke Peterson is a journalist and research consultant based in Ottawa, Ontario. He publishes an investigative news service, Investment Treaty News, for a Canadian think tank.

(www.iisd.org/investment/itn)