Ecuador Plans to Audit Bilateral Investment Treaties

By Mercedes Alvaro, Dow Jones Newswires
11 March 2013

Quito, Ecuador – Ecuador plans to establish a commission to audit bilateral investment treaties and the international system for investment arbitration, President Rafael Correa said over the weekend, after harshly criticizing Chevron Corp. (CVX) and Occidental Petroleum Corp. (OXY).

Both U.S oil companies have arbitration procedures underway against the Andean country.

In May 2006, Ecuador canceled Occidental's operating contract, alleging that Occidental broke the terms of its contract by transferring a 40% stake to Encana Corp. (ECA, ECA.T) without obtaining approval from the country's energy ministry.

Last year, a World Bank arbitration tribunal awarded Occidental damages of $1.77 billion in a claim the company brought against the government of Ecuador.

The tribunal said the Andean country in 2006 illegally nullified Occidental's exploration-and-production rights, violating the U.S.-Ecuador Bilateral Investment Treaty by expropriating the company's investment. The tribunal also said Ecuador's decision to terminate Occidental's contract for Block 15 was "tantamount to expropriation."

The Ecuadorian government has requested annulment of the court ruling.

In another case, an Ecuadorean court ruled last year that Chevron was responsible for environmental damages in the country's Amazon region and must pay $19 billion. Chevron, which has repeatedly denied the allegations, inherited the lawsuit when it bought Texaco Inc. in 2001.

In early February, an international arbitration tribunal in The Hague said Ecuador violated prior rulings issued by the court by not preventing the attempted enforcement of the $19 billion judgment.

Mr. Correa has called the ruling by The Hague a "legal aberration," saying it appealed to the Reciprocal Protection and Promotion of Investment treaty with the U.S. which came into force in 1997, while Texaco left the country in 1992.

Although Texaco left the country in 1992, the arbitration tribunal said, Texaco's investment didn't end at this time, so it is protected by the treaty.

Mr. Correa said both lawsuits from Occidental and Chevron could plunge the country into bankruptcy.

According to Mr. Correa, the planned audit of bilateral investment treaties will be performed by representatives of social movements and local and international experts, similar to how Ecuador audited its external debt in 2008.

In 2008, an special debt audit commission said it uncovered "illegality and illegitimacy" in the country's foreign debt and recommended it stop servicing the nation's global bonds. Based on this report, the government of President Correa defaulted on about $3.2 billion of global 2012 and 2030 bonds.

"Individually, these [multinational corporations] can trample our countries, can impose their abuses. Regionally, we impose our conditions to multinationals," Mr. Correa said during his weekly media address. "There will be a response from Unasur, from ALBA."

Members of ALBA, a political grouping that includes other leftist nations in Latin America, plan to meet in Ecuador in April to discuss strategies against lawsuits from multinational corporations, while also exchanging information and establishing judicial mechanisms of "mutual support."

Mr. Correa also said his government plans to challenge several bilateral investment treaties.

Since 2008, the country has cancelled about nine bilateral investment treaties. The country has also withdrawn from the International Centre for Settlement of Investment Disputes.