As El Salvador prepares for the next round of hearings before an International Commission for Settlement of International Disputes (ICSID) tribunal, a growing chorus of civil society organizations is calling for a renegotiation of CAFTA-DR (the Central American Free Trade Agreement). Their primary complaint is that the settlement dispute provisions in CAFTA-DR give private corporations the right to sue sovereign nations over investment disputes, limiting the country’s ability to protect its workers and environment. Though an ICSID tribunal recently dismissed the Commerce Group’s claim against El Salvador, Pacific Rim Mining Company’s suit claiming an estimated $100 million in lost investments and profits, lives on. You can read more about the Pacific Rim suit here, here and here).
In recent years, Ecuador has had to defend itself in several investment trade disputes similar to the one Pacific Rim has brought against El Salvador. As a result, when Ecuador adopted a new constitution last year, they included a provision (Article 422) that protects the country from international investors. Article 422 could set an important precedent for other nations in the region, including El Salvador.
Currently, Ecuador has been the subject of thirteen investment disputes before ICSID tribunals, the majority of which have involved oil and energy production. Of these thirteen cases, four were decided on the merits, three have been settled, one has been discontinued, and five remain pending. Though Ecuador won three of the four cases decided on their merits, the country has paid approximately $90 million in damages and settlements. These payments motivated Ecuadorans to reconsider their consent to ICSID and other tribunals.
Article 422 simply states that Ecuador will not sign treaties or international instruments in which the State cedes sovereign jurisdiction in instances of arbitration in contract or business disputes of any kind between the State and a natural or legal person. The exceptions are treaties and instruments that create dispute resolution mechanisms between States and persons in Latin America by regional arbitration or by judicial bodies from signatory countries.
Ecuador’s new approach has drawn both praise and criticism. Critics are concerned that parts of Article 422 are vague and will be difficult to implement, raising concerns about how it will affect Ecuador’s relationships with foreign investors. Without an adequate dispute settlement protection, the risk of investment increases, which could scare away much-needed development. Critics are also concerned that by opting out of arbitration in some cases but not others they are creating another level of discrimination in the Ecuadoran legal system, allowing domestic investors more rights than international investors. Such discrimination is troubling for a modern legal system that is supposed to be based on equality.
Supporters of Article 422 praise it as Ecuador’s protecting its sovereignty and national identity, which has been a priority for Ecuadoran President Rafael Correa. Though Ecuador has never been reflexively anti-U.S., the relationship between the two countries has been steeped in economic, political, and military pressure. Article 422 is seen by many as a move to assert greater independence. It also contributes to a growing sense of Latin American regionalism by deepening the economic and political integration among its neighbors.
Though article 422 limits Ecuador’s exposure to investor-state arbitration, it allows investors to file a complaint in a domestic court. This will limit Ecuador’s exposure and protect their regulatory authority, while ensuring that investors have a way to protect themselves.
Ecuador’s move to protect itself against the onslaught of investor suits is an important development in the debate over investor-state relations. It also contributes to the renewed vision of Latin American regionalism. Whether other nations in Central and South American follow in Ecuador’s footsteps remains to be seen. But it is clear that the debate over investor rights in El Salvador and other countries is not over.