An ICSID tribunal denies jurisdiction for failure to satisfy BIT's "cooling-off" period: further evidence of a sea change in investor-state arbitration or a meaningless ripple?

• Author: Deutsch, Richard
• Position: International Centre for Settlement of Investment Disputes, bilateral investment treaties

1. INTRODUCTION II. THE DISPUTE III. THE ECUADOR-U.S. BIT A. The Role of BITs in International Investor-State Disputes B. BITs Offer Dispute Settlement Through ICSID Arbitration C. Ecuador- U.S. BIT's Prerequisites to Arbitration: "Cooling-Off" Period Prior to ICSID Arbitration. IV. ECUADOR'S OBJECTIONS TO JURISDICTION FOR FAILURE TO PROVIDE REQUIRED NOTICE A. The Parties" Jurisdictional Arguments B. The Tribunal's Findings V. DOES MURPHY INTERNATIONAL REFLECT A SEA CHANGE IN TREATY-BASED INVESTOR-STATE ARBITRATION OR A SLIGHT RIPPLE? A. Have BIT Arbitrations Begun to Favor States Instead of Foreign Investors? Does This Favoritism Exist Outside of the Minds of Disgruntled Parties? B. Murphy International Award In Relation to Other "Cooling-Off" Awards VI. CONCLUSION I. INTRODUCTION

   On December 15, 2010, an International Centre for Settlement of Investment Disputes ("ICSID") Tribunal ruled that it lacked jurisdiction over an arbitral claim brought by U.S. energy company Murphy Exploration and Production International ("Murphy International") against the Government of Ecuador. (1) The tribunal ruled that Murphy International failed to satisfy the "cooling-off' period in the underlying treaty prior to filing its Request for Arbitration. (2)

   The tribunal's decision will likely fuel an ongoing debate in the international arbitration community over the role of bilateral investment treaties ("BITs") in investor-state arbitrations. In the past, foreign states often found themselves on the losing end of these arbitrations, resulting in complaints that the system was unfair and tilted against them. (3) The foreign states claimed the system favored foreign investors who had the advantage of unlimited financial resources and political support. (4) Some countries went so far as to denounce the mettlesome treaties that bound them to international arbitration. (5) More recent decisions, however, like the Murphy International jurisdiction award, have seemingly shifted the debate, and now it is the investors that have begun voicing concerns over the reliability and integrity of the system. Of course, there is no telling whether there has been an actual shift in treaty-based investor-state arbitration, or if such swings even exist outside the imagination of disgruntled parties. One thing, however, is certain: the Murphy International jurisdiction award, and other recent rulings against investors, will fuel continued debate within the international arbitration community and amongst investors about the future and integrity of treaty-based investor-state arbitration.

2. THE DISPUTE

   In 1987, Murphy Ecuador Oil Company Limited ("Murphy Ecuador") joined a consortium of parties to a service contract with Petroecuador on behalf of the Republic of Ecuador. (6) Murphy Ecuador is controlled by Murphy International. (7) Subsequently, Repsol YPF Ecuador SA ("Repsol") acquired an interest in the contract and became the operator for the consortium. (8) A dispute arose in 2006 when Ecuador amended its Hydrocarbons Law through the passage of Law 42-2006 ("Law 42"). (9) This amendment (and subsequent related legislation) raised Ecuador's economic participation in existing oil contracts held by its national oil company. (10)

   Murphy International claimed this enactment violated the bilateral investment treaty between Ecuador and the U.S. (the "Ecuador-U.S. BIT"). (11) The alleged treaty violations caused serious economic damage to Murphy Ecuador, Murphy International's investment located in Ecuador. (12) The Ecuador-U.S. BIT calls for disputes arising from that treaty to be settled through international arbitration under the auspices of ICSID. (13)

   When Ecuador passed Law 42, the consortium had been in discussions with Ecuador regarding its desire to raise its participation. (14) Following passage of the Law 42, the U.S. Embassy in Ecuador publically criticized the legislation. (15) On November 12, 2007, Repsol, on behalf of the consortium (of which Murphy Ecuador, but not Murphy International, was a member) submitted a letter to Ecuador notifying it that its acts constituted breaches of the Ecuador-U.S. BIT. (16) On February 29, 2008, Murphy International notified Ecuador of an investment dispute arising under the Ecuador-U.S. BIT. (17)

   Soon thereafter, on March 3, 2008, Murphy International filed its Request for Arbitration. (18) Murphy International claimed Ecuador's alteration of its Hydrocarbons Law and related acts violated the Ecuador-U.S. BIT's guarantees of full protection and security, fair and equitable treatment, and non-arbitrary treatment of U.S. investments. (19) Following the parties' initial submissions, Ecuador submitted its Objections to Jurisdiction on October 15, 2009, claiming the arbitral tribunal lacked jurisdiction to consider this dispute due to, among other reasons, Murphy International's failure to satisfy the notice and negotiation requirements of the Ecuador-U.S. BIT. (20)

3. THE ECUADOR-U.S. BIT

   1. The Role of BITs in International Investor-State Disputes

      Many energy project investors have availed themselves to a network of specialized treaties that protect assets (investments) of one country's investors against improper actions by the other signatory country's government. (21) Among these treaties, the role of BITs has grown prominently. (22)

      BITs are treaties between nations, "state parties," that set forth standards of conduct for the government of each state party toward investments of persons and companies of the other state party. (23) For example, the Ecuador-U.S. BIT regulates how the U.S. will treat Ecuadorian investors' investments in the U.S., and vice versa. (24)

      BITs offer investors protections under international law largely independent of a contract's specific provisions and local, host-state law. (25) BITs typically provide treatment protections including national and most-favored-nation status, fair and equitable treatment, various sorts of nondiscrimination, compensation for improper direct and indirect expropriations, and dispute resolution provisions. (26) Over 3,000 BITs presently exist. (27)

   2. BITs Offer Dispute Settlement Through ICSID Arbitration

      Many BITs allow the investor to choose arbitration under the ICSID Convention. ICSID, whose stated purpose is "to provide facilities for conciliation and arbitration of investment disputes between Contracting States and nationals of other Contracting States," (28) has become a preferred forum for disputes with foreign governments because of its enforceability provisions. (29) Each of the 147 ICSID state parties is obligated to enforce ICSID arbitration awards as if they were decisions from their own courts. (30) Also, ICSID's affiliation with the World Bank is perceived as an incentive for states to pay arbitration awards. (31) For these reasons, ICSID arbitration awards are deemed more...