New Ecuadorian Government Teams Up with Powerful International Lobbies to Rejoin Investment Treaties Prohibited by the Constitution

July 14, 2021

Andrés Arauz

This post was originally published by the Institute for New Economic Thinking on July 14, 2021.

Diario-Radio UChile, July 16, 2021

En espanol

In his two months since becoming president, Guillermo Lasso has taken aggressive steps to rejoin Investor-State Dispute Settlement (ISDS) mechanisms that Ecuador had previously denounced. On June 21, Ecuador’s ambassador to Washington signed the country’s re-entry into the World Bank’s International Center for Settlement of Investment Disputes (ICSID), which Ecuador had pulled out of in 2009. Then, incredibly but perhaps unsurprisingly, Ecuador’s Constitutional Court decided that Ecuador’s reentry into ICSID did not require legislative ratification. Now, the government is pushing for a reinterpretation of the Constitution that would allow for Ecuador to enter into bilateral investment treaties (BITs).

Ecuador’s withdrawal from ICSID was part of a broader process that resulted in the termination of all of Ecuador’s BITs. Article 422 of the new Ecuadorian Constitution, adopted by popular referendum in 2008, stipulates: “The Ecuadorian State shall not enter into treaties or international instruments where the Ecuadorian State yields its sovereign jurisdiction to international arbitration entities in contractual or commercial disputes between the State and natural persons or legal entities.”

As a result, the government of Rafael Correa (2007–2017) terminated a first batch of BITs in 2008. A few months later, it left ICSID. In 2013, the Ecuadorian government commissioned a group of experts to audit its arbitration cases and all its BITs, including the legality of their ratification, and their repercussions on the country. The Commission for the Audit of Investment Protection Treaties (CAITISA), composed of academics, lawyers, government officials, and civil society groups, concluded that many of Ecuador’s BITs had not been adequately ratified. It also found that the treaties failed to attract foreign investment to Ecuador.

CAITISA’s report also identified the usual snags of ISDS mechanisms, not least the problematic issue of arbitration: lawyers with close ties to industry being contracted on a case-by-case basis to moonlight as arbitrators for these mechanisms, and Global South countries mostly losing (at best tying) arbitration cases against transnational corporations, even when the governments had been acting in the best interests of their country or defending the rights of their people. The report confirmed, as many academic studies had before, that foreign investment goes to countries that experience steady economic growth; have strong institutions, including a strong judiciary; and are stable, including politically and socially. It debunked, once again, the myth that aggressive deregulation and forfeiting sovereignty are a magical path to attracting investment. Furthermore, the report demonstrated that the BITs created a shield of impunity for transnational corporations’ environmental damage and tax evasion.

Ecuador was also able to capitalize on a growing global consensus regarding the negative effects of ISDS, which many countries signed on to from the late ‘80s to the early 2000s, during the heyday of deregulation and race-to-the-bottom approaches to attracting investment. Some of the larger emerging economies had led the way: South Africa terminated its investment treaties in 2012; Indonesia in 2014; India in 2017. Among Latin American states, Brazil never ratified any treaties that included ISDS, and Bolivia terminated its BITs in 2008.

Even the European Union was having second thoughts, as a result of several EU member states being sanctioned by arbitration courts merely for upholding European law. This led European Commission President Jean-Claude Juncker to write, “… Nor will I accept that the jurisdiction of courts in the EU Member States is limited by special regimes for investor disputes.” Then Donald Trump announced that he would revisit the ISDS clauses of NAFTA, and both Democrats and some Republicans wanted to water down ISDS provisions in the US-Mexico-Canada Agreement that replaced NAFTA. The consensus around ISDS seemed to be dwindling. After fresh authorization from Parliament, and with prior decisions by the Constitutional Court, in May 2017, Ecuador finally terminated its 16 remaining BITs, including with global heavyweights such as the United States, the United Kingdom, France, Germany, Spain, China, and the Netherlands.

Ecuador’s next president, Lenín Moreno (2017–2021), did not share this critique of the mechanisms that corporations use to coerce states into shunning effective regulatory systems, be they in the realm of taxation, environmental safeguards, or labor rights. Eager to return to the neoliberal policies of the 1990s, and under intense lobbying from transnational corporations, the Moreno government asked the Constitutional Court to reinterpret Article 422, arguing that it only applied to trade disputes. The move was remarkable in its audacity: Article 422, which mentions the generic term “contract,” is clearly intended to prohibit arbitration of investment disputes. The minutes from the Constituent Assembly that drafted the Constitution, and the Constitutional Court’s multiple prior decisions, also support the interpretation that Article 422 concerns investment. The court has thus received scores of amicus curiae from reputed domestic and foreign academic experts and from civil society organizations calling on it to reject the bid.

The deadline for the Constitutional Court’s interpretation of Article 422 has long passed, but the new government of neoliberal die-hard Guillermo Lasso is applying increasing pressure on the court to allow for a swift return to ISDS mechanisms. The government presented its signing of ICSID as a fait accompli to put pressure on a Constitutional Court that didn’t require much pressing. The court had allocated responsibility for analyzing reentry into ICSID to Teresa Nuques, a justice who should have been disqualified from being rapporteur judge in this case for having been the director of the arbitration center of the Guayaquil Chamber of Commerce and a vocal proponent of ISDS. In the end, two justices argued correctly that Article 419 of the Constitution requires legislative approval of any treaty that involves relinquishing domestic juridical powers to a supranational body. But they were outnumbered. On June 30, the court announced its decision that legislative approval of ICSID membership was not mandatory.

The timing of Ecuador’s reentry into ICSID is also striking. A mere three weeks earlier, ICSID ruled in favor of Franco-British oil company Perenco in its arbitration case against Ecuador. The company was awarded US $412 million (a US $372 million fine, plus interest) from Ecuador for breaching the France-Ecuador BIT clause on “indirect expropriation.” In 2006, Ecuador’s Congress had unanimously passed a law that mandated revenue-sharing of windfalls resulting from surges in commodity prices. In 2007, the government further modified a regulation to maximize revenues for the State. Most oil companies established in Ecuador accepted the new terms, but not Perenco, which never paid the amount due. When the tax authority claimed the amount owed by seizing an equivalent quantity of oil, Perenco left the country, without paying for the damage that its operations caused to the environment. While the arbitrators did not consider the windfall revenue sharing to be expropriation, they did decide that Ecuador’s decision to take over Perenco’s operations, after the company left the country, fit that criterion.

The Perenco case is a perfect example of everything wrong about current forms of ISDS. Perenco is not headquartered in France or the UK; it is registered in the Bahamas. At the time of the dispute, the Bahamas was on both Ecuador and France’s list of tax havens. Perenco Ecuador Limited, moreover, has four other Bahamas-based entities in its chain of shell companies before actual physical persons can be identified as shareholders. Of course, there is no — and has never been — investment treaty between Ecuador and the Bahamas. So Perenco, headed by the wealthy Perrodo family (considered to have the fourteenth-largest fortune in France), went “treaty shopping.” Corporations established in tax havens often resort to the corrupt practice of “shopping” for investment treaties signed by other countries in order to enjoy the best of both worlds: protection and impunity.

France could seize this opportunity to rein in its corporations so that they can’t have their cake and eat it. If you evade taxes, then you can’t enjoy the protection of treaties signed by the French state. President Emmanuel Macron has often criticized tax evasion. His minister of the economy and finance, Bruno Le Maire, has said, “tax evasion is not only an attack on the treasury. It’s an attack on democracy.” The Perenco case provides an ideal test of France’s commitment to seriously tackle this problem by agreeing to a bilateral interpretation of the BIT.

The Ecuadorian Ministry of Communication, for its part, announced on June 1 that the Ecuadorian government would pay Perenco the fine. Ecuador could of course resort to several measures to avoid — or to at least significantly delay — this payment, especially given the extent of Ecuador’s economic crisis and the resources it desperately needs to tackle the pandemic (Ecuador has one of the highest per capita COVID-19 death tolls in the world, and its economy shrunk by 9 percent in 2020). First, the government could request a new annulment process on the basis that Peter Tomka, the main arbitrator in the case, was simultaneously a full-time judge for the International Court of Justice (ICJ), which prohibits its judges from taking complementary income elsewhere. While this would apparently be a breach of the ICJ rules and not of the arbitration, the ICJ is an international public law institution of which both France and Ecuador are members.

The second pathway is for the government to request an exequatur procedure, a process by which local courts decide whether to execute a court decision from another jurisdiction. The case is unusual in that the arbitral award was issued after one of the states left the ICSID, and after terminating the BIT that is the basis for arbitration. Perenco would thus have to resort to a foreign court and then have that arbitration award recognized by Ecuadorian courts, according to the New York Convention, an international treaty that sets requirements for validation of foreign judicial decisions. But Lasso has already made it clear by rejoining ICSID that his government has no intention of contesting payment to the company.

It remains to be seen whether Ecuador will be able to go back to signing investment treaties with other countries. The Constitutional Court will again have a binding say and the court will find it more difficult to argue, as it did in the case of ICSID, that investment treaty ratifications do not require parliamentary approval. But the corporate interests promoting a return to a pro-ISDS agenda are formidable, and the lobbying to bypass parliamentary authorization is intense. Crony firms keen on participating in fire-sale privatizations, for example, are anxious to anchor new trade and investment treaties with ISDS chapters. And the Lasso government is eager to sell off as many state-owned assets as possible. It is no coincidence that, a week after the Constitutional Court gave the go-ahead for Ecuador’s return to ICSID, Lasso issued an executive decree that mandates the gradual privatization of the state-owned oil industry and highlights international arbitration as a cornerstone of his policy.

Civil society organizations opposed to current forms of ISDS that bleed countries in favor of capital should see Ecuador as a paradigmatic case of the struggle against corporate privileges running roughshod over protection of the environment and the rights of workers and people. 

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