The Story: Chronicle of a Death Foretold –

By: Camilo Muriel and Javier Jaramillo

In the past few days, the Ecuadorian National Assembly took one of its last steps to formally terminate, also known as denunciate, bilateral investment treaties (BITs) in force with several countries.

The formal proceedings began in 2009, although the source of the denunciations goes back to 2008, when the current Constitution of the Republic of Ecuador entered into force. The Ecuadorian President requested the National Assembly to terminate the BITs arguing that article 422 of the Constitution forbids the execution of international treaties in which the State of Ecuador assigns its jurisdiction to international arbitration fora.

In 2010, the National Assembly approved the denunciation of the BITs executed with Finland, the United Kingdom, and Germany; and in 2011, it approved the denunciation of those signed with Sweden and France. However, despite this fact the President only went forward with the formal denunciation of the BIT entered into with Finland.

On May 3rd, the National Assembly approved the denunciation of the following 12 BITs  with Argentina, Bolivia, Canada, Chile, China, Spain, United States, Italy, the Netherlands, Peru, Switzerland, and Venezuela.

Frequently Asked Questions. –

What is a BIT?

It is an international treaty signed between two States in order to attract direct foreign investment by offering protection standards to investors. Under a BIT, an investor can directly sue the investment’s host State for violations to the referenced standards, usually through international arbitration proceedings.

What is a denunciation of a BIT?

It is the process pursuant to which a State terminates a BIT. The effect of this termination consists of the BIT ceasing to have effect, as specified in its text.

Does the Ecuadorian Assembly’s decision cause the treaties’ immediate denunciation and termination?

The specific validity of the treaties depends on the terms of each BIT. For denunciation to operate, the majority of BITs provide a requirement of formal and official notice to the
State with which the BIT was signed. Some of the BIT´s provide that said notice will only take effect after a certain period of time determined in the BIT elapses. For example, the Ecuador – United States BIT requires formal and written notice sent a year in advance.

Are investors who make investments prior to denunciation left unprotected?

This will also depend on the terms of each BIT. However, the majority of BITs include survival clauses, pursuant to which, once the treaty has been formally denounced, investments performed prior to said denunciation enjoy the BIT’s protection throughout a certain number of years, called survival period. The survival period is usually between 5 and 20 years. For example, the BIT signed with the United Kingdom provides a 20-year survival period.

What happens to investments made after the denunciation?

Once the denunciation takes effect, the BIT no longer protects new investments. Survival clauses do not apply to investments performed after denunciation.

What happens to contracts with international arbitration clauses? Will they be affected by denunciation of the BITs?

No. Validly executed contracts containing an arbitration clause are not affected by the denunciation of the BITs. Article 190 of Ecuador’s Constitution recognizes arbitration as a dispute resolution method. Furthermore, investment arbitration provided in a BIT is different from contractual arbitration set forth in a contract.

How do we protect investments that are not protected by a BIT?

Investors can ensure their investments by executing investment contracts that provide, among other matters, stability clauses, investment protection standards, adequate dispute resolution mechanisms, and other protections.

What can we expect regarding international investment protection and arbitration instruments?

The President of the Sovereignty, Integration, Foreign Affairs, and Comprehensive Security Commission of the National Assembly noted that the objective of the denunciations is to renegotiate the treaties “under equal conditions”. In its last report, the Commission recommended the following:

  • Continue denouncing all BITs in order to negotiate new treaties.
  • Request that the Executive disclose the report Commission for Comprehensive Audit of the Reciprocal Investment Treaties and the Investment International Arbitration System (CAITISA)’s reports.[1]
  • Request that the Executive publish guidelines an “Alternative Investment Treaty Model” prepared by CAITISA.
  • Request that the Ministry of Foreign Affairs boost Ecuador’s position in UNASUR, and create and make UNASUR’s Arbitration Center operational.

Furthermore, the Commission recommended promoting:

  • A south-based transnational observatory.
  • A system to address and process treaties signed by Ecuador.
  • The Central Bank’s review of its information systems regarding behavior of foreign investment “in order to design a tool that permits public authorities to define the protections that shall be provided to foreign investors, in observance of constitutional rules and the National Good Living Plan.”

CAITISA’s formal report, issued on May 8, 2017, questioned the system as a whole and arbitration as a dispute resolution system. Furthermore, it recommended terminating the denunciations, negotiating treaties with limited rights, and, if new treaties were negotiated, doing so based on an alternative model. It indicated that this model would have different

[1] The Commission for Comprehensive Audit of the Reciprocal Investment Treaties and the Investment International Arbitration System (CAITISA, for its initials in Spanish) was created through Executive Decree N°1506, dated as of May 6, 2013, in order to revise BITs and the investment arbitration system.

Warning: This newsletter by Pérez Bustamante & Ponce is not and cannot be used as legal advice or opinion since it is merely of an informative nature.

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