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NEWS AND BULLETINS

Denunciation of Bilateral Investment Treaties – Impact on Canadian investments

With the approval by the National Assembly of the denunciation of twelve foreign investment protection treaties, the government of Ecuador is on the verge of finalizing the process of termination of these treaties, including the Foreign Investment Protection Agreement entered into by Ecuador and Canada (“Canada-Ecuador FIPA”).

It must be noted that all investments and commitments to invest made by Canadian Investors prior to the termination of the Canada-Ecuador FIPA are protected for a period of fifteen years from the date of the termination. The termination of the Canada-Ecuador FIPA shall become effective one year after the Ecuadorian government notifies the Canadian government with termination of the Canada-Ecuador FIPA.

It is highly recommended that any and all investments and commitments to invest by a Canadian Investor be protected through an investment protection agreement entered into directly by the Investor with the government of Ecuador, in order to stipulate the treatment that shall be given to the investment, the rights of the investor and international arbitration.

1. Background

On September 28, 2009, President Correa sent a request to the National Assembly of Ecuador (“NA”) to approve the denunciation of BITs entered into by Ecuador with certain major capital exporting countries, including Canada. The other countries affected by this request include Argentina, Chile, China, Finland, France, Germany, Netherlands, United Kingdom, United States, Switzerland, Sweden and Venezuela.

Following the National Assembly´s official notification that their approval of the treaty denunciation first required a Constitutional Court (“CC”) ruling, the President filed on January 6, 2010, a submission to the CC requesting a favorable ruling to initiate the denunciation process.

On November 4, 2010, a CC ruling was published on the Official Gazette approving the denunciation of the Canada-Ecuador FIPA because the CC considered that the provision of articles XIII and XIV were contrary to the Constitution of 2008.

On May 3, 2017, the NA approved the denunciation of 12 BITs, including the Canada- Ecuador FIPA. Following this approval, the Government of Ecuador is in a position to issue the termination notice any time. The termination of the Canada-Ecuador FIPA shall be effective one year after the notification is made.

2. Termination of Canada-Ecuador FIPA

The Canada-Ecuador FIPA expressly provides for the right of a Party to terminate the treaty by giving one-year advance notice. Once termination becomes effective, that is one year after the termination notice is delivered-–the Effective Termination Date-, all of the articles of the treaty (except for Article XVIII which sets out the termination provision) remain in full force and effect for a period of 15 years for “investments” or “commitments to invest” made prior to the Effective Termination Date. Investments or commitments to invest made after the Effective Termination Date will not be eligible for FIPA protection and will have to rely on domestic legislation for protection. Ecuadorian legislation provides for investment agreements, a form of protection discussed at the end of this newsletter.

The termination provisions can be found in Article XVIII(2) of the Canada-Ecuador FIPA, as follows:

“This Agreement shall remain in force unless either Contracting Party notifies the other Contracting Part in writing of its intention to terminate it. The termination of this Agreement shall become effective one year after notice of termination has been received by the other Contracting Party. In respect of investments or commitments to invest made prior to the date when the termination of this Agreement becomes effective, the provisions of Articles I to XVII inclusive of this Agreement shall remain in force for a period of fifteen years.”

In our view, based on the express wording found in the Canada-Ecuador FIPA, the interpretation rules found in the Vienna Convention on Law of Treaties, and relevant international law authorities and jurisprudence, Article XVIII(2) of the Canada-Ecuador FIPA will allow the Investor the right to assert claims under the treaty for a period of fifteen years following the termination of the treaty, so long as these claims arise out of “investments” or “commitments to invest” made prior to the date on which the termination of the treaty becomes effective-–the Effective Termination Date.

Furthermore, in our view the unconditional consent provided by Ecuador to the submission of a dispute to international arbitration in accordance with the provisions of this Article XIII of the Canada-Ecuador FIPA, will permit a Canadian investor who has made “investments” or “commitments to invest” within the requisite period, the right to invoke the arbitration mechanism for a period of fifteen years following the termination of the treaty, notwithstanding any statement or notice by Ecuador withdrawing such consent. In other words, the investor’s submission of a dispute to arbitration including the concurrent consent for arbitration, required from the investor, need not be provided in advance of the effective termination of the Canada- Ecuador FIPA (or prior to the date of the giving of notice by Ecuador to the Government of Canada, seeking to terminate the treaty).

In order to exercise its right to seek arbitration, the Investor would be able to initiate the proceeding pursuant to Article XIII at any time within the fifteen-year survival period, provided it meets the requirements for submitting the dispute to arbitration and providing its consent.

3. Existence of “investment” and “commitments to invest”

In order to have standing to bring a claim under the Canada-Ecuador FIPA, the investor (as defined in the Canada-Ecuador FIPA) has to have made an “investment” in the territory of the other party.

Therefore, for the Investor to make a claim under the Canada-Ecuador FIPA, it will have to prove that it has acquired ownership of assets in Ecuador (whether owned directly or indirectly), within the meaning of paragraph (g) of Article I of the treaty:

“investment” means any kind of asset owned or controlled either directly, or indirectly through an investor of a third State, by an investor of one Contracting Party in the territory of the other Contracting Party in accordance with the latter’s laws and, in particular, though not exclusively, includes:

  • movable and immovable property and any related property rights, such as mortgages, liens or pledges;
  • shares, stock, bonds and debentures or any other form of participation in a company, business enterprise or joint venture;
  • money, claims to money, and claims to performance under contract having a financial value;
  • goodwill;
  • intellectual property rights;
  • rights, conferred by law or under contract, to undertake any economic and commercial activity, including any rights to search for, cultivate, extract or exploit natural resources

but does not mean real estate or other property, tangible or intangible, not acquired in the expectation or used for the purpose of economic benefit or other business purposes.

Any change in the form of an investment does not affect its character as an investment.”

We are of the view that the mineral rights owned by an Investor are, in accordance with the laws of Ecuador, “assets” and in particular constitute “rights, conferred by law…including any rights to search for,…extract or exploit natural resources.”

Regarding the relationship between the investments made and a hypothetical claim for compensation, Article VIII of the Canada-Ecuador FIPA sets forth that, in the case of expropriations or measures of equivalent effect, “compensation shall be based on the genuine value of the investment or returns” immediately before the expropriation. The commonly accepted interpretation of this provision is that compensation should be determined with reference to the intrinsic value and reasonable expected returns from an investment, even if that value results in a higher figure than the amounts actually spent by the investor in order to acquire, obtain, secure or develop the asset, or to purchase the asset at a later date. By the same token, the investor would not be entitled to a compensation based on the values spent if the intrinsic value and reasonable expected returns determined a lesser figure.

4. Timing for filing of claim

The bringing of an arbitration proceeding under the Canada-Ecuador FIPA is based on the investor satisfying certain conditions, including providing notice of a claim by the investor “that a measure taken or not taken by the…Contracting Party is in breach of this Agreement, and that the investor has incurred loss or damage by reason of, or arising out of, that breach.”

Furthermore, before the dispute can be submitted to arbitration, the investor and the state claimed to have breached the treaty have to engage in a period of amicable settlement, for a period of no less than six months from the date on which the notice concerning the claim is delivered.

The investor, after delivering the notice in writing to the state, and after the passage of six months can then, at its election, submit the dispute to international arbitration only if:

  • the investor has consented in writing thereto;
  • the investor has waived its right to initiate or continue any other proceedings in relation to the measure that is alleged to be in breach of this Agreement before the courts or tribunals of the Contracting Party concerned or in a dispute settlement procedure of any kind;
  • if the matter involves taxation, the conditions specified in paragraph 5 of Article XII have been fulfilled; and
  • not more than three years have elapsed from the date on which the investor first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that the investor has incurred loss or

5. Dispute resolution process

As a result, Canadian investors seeking to bring a claim under the Canada-Ecuador FIPA have to submit the claim to arbitration under the Additional Facility Rules of ICSID, or to an international arbitrator or ad hoc arbitration tribunal established under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL).

In making a claim under the Canada-Ecuador FIPA, and submitting the claim to arbitration to an ad hoc tribunal established under UNCITRAL rules, we can advise that consent will be required to be given only when the claim is submitted to arbitration. In other words, there is no immediate requirement for the Investor to provide in advance of the hypothetical submission of the dispute to international arbitration, the consent for the arbitration.

Furthermore, there is no requirement that there exist a contractual basis for the submission of the dispute to arbitration, as the terms of the Canada-Ecuador FIPA expressly provide that arbitration process can be invoked at the election of the investor by giving its consent at that time, based on the existence of the prior “unconditional consent [of Ecuador] to the submission of a dispute to international arbitration in accordance with the provisions of” the Canada-Ecuador FIPA.

There is ample authority for this conclusion, and it is well summarized in the following passages from an authoritative text on the subject matter:

“The greatest difference to commercial arbitrations is the source of the tribunal’s power. Commercial arbitrations require an arbitration agreement between the parties. By contrast, in investment disputes arbitration may also be possible without such an arbitration agreement in the ordinary sense. National legislation or treaties may give each party the right to initiate arbitration proceedings against each other. There may even be no contractual relationship between the parties at all which has led to labelling investment arbitration “arbitration without privity.”

Investment arbitrations are frequently based on provisions in national investment protection laws or international treaties by which the state agrees generally to arbitrate investment disputes. These provisions constitute an unilateral standing offer to the public to submit to arbitration with any party fulfilling the requirements. The offer is accepted by the investor when it initiates arbitration proceedings against the state. Until that time the investor is not bound to arbitrate and the state cannot initiate proceedings against the investor.

Disputes on jurisdiction are often not about interpreting a contract between the parties. Rather the tribunal will interpret the statutes, treaties and conventions, to see whether the dispute falls within the ambit of the state’s obligation to arbitrate in these instruments.

We can therefore advise that the making of a claim under the Canada-Ecuador FIPA, and submission of the claim to arbitration to an ad-hoc tribunal established under UNCITRAL rules, will require consent to be given by the Investor only when the claim is submitted to arbitration.

6. Conclusion

The internal approval process for the Ecuador-Canada BIT termination requested by the Government of Ecuador is soon to be concluded, only awaiting official notification by the Republic of Ecuador to the Canadian Government with the official termination notice of the Canada-Ecuador FIPA. Once this notification is made the Canada-Ecuador FIPA will be in force for the period of one additional year, ergo, the termination shall become effective one year after the notification is made.

The Canada-Ecuador FIPA recognize and respect the Investor’s right to assert arbitration claims under the treaty for a period of fifteen years following the termination of the treaty, so long as these claims arise out of “investments” or “commitments to invest” made prior to the date on which the termination of the treaty becomes effective. The arbitration claims shall have to be submitted under UNCITRAL rules, as at this point neither Canada nor Ecuador are ICSID members.

The mineral rights are, in accordance with the laws of Ecuador, “assets” and in particular constitute “rights, conferred by law…including any rights to search for,…extract or exploit natural resources”.

In making a claim under the Canada-Ecuador FIPA, and submitting the claim to arbitration to an ad hoc tribunal established under UNCITRAL rules, consent will be required to be given only when the investor claims are submitted to arbitration, as there is no immediate requirement to provide in advance of the submission of the dispute to international arbitration, the consent for the arbitration.

7. Recommendations

In order to mitigate the impact of the absence of an investment protection treaty between Ecuador a Canada, it is highly recommended that any investment made by an Investor be protected by an investment protection agreement entered into directly by the Investor with the Ecuadorian government in application of the Ecuador Production Code.

Ecuadorian domestic legislation expressly recognizes and allows for the government to enter into direct investment protection agreements (“IPA”) with national and foreign investors. The scope of the IPA´s is very ample under the law as it allows to contractually stipulate the treatment that the government shall give to the investment. The term of the IPA´s is for a period of fifteen years, extendable for an additional period of fifteen years (only in the case of public private partnerships the IPA term can be the same as the PPP contract).

Notwithstanding the aforementioned, the IPA´s entered into by the Ecuadorian government with investors since 2010 (date in which the law that regulates the IPA´s was published) have been mostly limited to grant the investor a tax stability during the IPA´s term. This limited scope of the IPA´s was justified for foreign investors as the investment was usually protected under an investment protection treaty between Ecuador and the state from which the investor was a national from.

In light of the termination of investment protection treaties between Ecuador and other States in the near future, the Ecuadorian government will be forced to expand the scope of the IPA´s, not only to grant tax stability for the investor, but also to include a detailed chapter on the investor rights and the dispute resolution process acceptable to investors. While general legal stability –as opposed to tax stability- remains largely untested under the IPA structure, we are of the opinion that domestic legislation provides enough support to develop this concept in the IPA context.

An opinion containing the details and particulars of the IPA´s under Ecuadorian domestic legislation will be addressed in our next publication.


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