Ecuador was one of the first countries to reject international investment arbitration, back in 2008. Its new ultra neo-liberal government just tried to reverse that. Voters refused to let it.
As we reported in March, the left-leaning government of the small Central American country of Honduras recently shocked the world by announcing its departure from the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), arguing that the court was infringing illegally on Honduran sovereignty. In the end, it came down to a choice between walking away from the world’s most powerful arbitration court or waiting for the imposition of crippling fines that would almost certainly bankrupt the country.
That’s not to say that Honduras is out of the woods just yet. As a 2023 article by Bretton Woods Project notes, “even if Honduras does withdraw from ICSID over Prospera’s claim, ISDS cases could still be brought against the country”:
It would still have to defend Prospera’s $11 billion claim, and any others filed within a six-month window of formal withdrawal notification. Honduras could also potentially be subject to further cases through one of the eight bilateral investment treaties it has signed that refers arbitration to ICSID.
For those unfamiliar with this topic, investor state dispute settlements, or ISDS, clauses are what give most bilateral or multilateral investment treaties their claws and their teeth, essentially enabling foreign investors to ride roughshod over domestic laws and regulations. As the piece in Bretton Woods Project puts it, “they are pervasive, difficult to evade and of no discernible benefit,” apart from to giant corporations.
Put simply, foreign companies and investors get to sue governments for any loss of profit, including profits not yet earned, resulting from new laws and regulations. As no doubt intended, they have a chilling effect on public-interest regulatory action, particularly in areas such as environmental protection and public health.
The cases are decided by secret panels staffed by highly-paid, investor-friendly arbitrators and are always brought by corporations against governments, never the other way round. As a recent letter signed by 100 international organisations notes, “the host State can only defend itself. In short, it is a mechanism created by and for investors, giving them access to a private, parallel and privileged judicial channel, bypassing national justice.”
A Rare Victory
Over the weekend, the global investor-state dispute settlement system suffered its second major setback so far this year when the people of Ecuador voted in a referendum to, among other things, preserve Article 422 of the country’s 2008 constitution, which bans the Ecuadorian state from ceding its sovereign jurisdiction to international arbitration bodies.
Ecuador’s new ultra neo-liberal government had surreptitiously slipped a proposal to bring back ISDS clauses into an 11-question referendum ostensibly on national security issues, presumably hoping that no one would notice. But voters cottoned on to the ruse, largely because of the furor caused by opposition parties, NGOs and indigenous groups. In the end, sixty-three percent voted against the reimposition of ISDS clauses in trade agreements. A large majority also voted unanimously to reject a government proposal to introduce hourly work contracts.
All of the other proposals, relating to the country’s security crisis, were passed, meaning that Ecuador’s army can now operate alongside the police without the government needing to declare a state of emergency. The extradition to the United States of organised crime bosses was also approved. The resulting constitutional amendments will essentially normalise the “state of internal armed conflict” that President Noboa declared in the country in January.
But Noboa could not get his two economic proposals passed. This is the second time the Ecuadorian people have voted to reject ISDS and its arbitration courts “by means of a direct vote at the ballot box,” notes Guillaume Long, a former minister in the Rafael Correa government that introduced Article 422 in the new constitution and spent the next nine years implementing it:
The first time was in the 2008 constitutional referendum when a new constitution, including article 422 banning ISDS, was submitted to a popular vote. Then came the hard task of exiting ISDS commitments which the government and legislators managed to do. But it took 8 years to fully achieve this, in the face of powerful lobbies doing their utmost to uphold ISDS. Ecuador first withdrew from ICSID and then terminated 24 bilateral investment treaties. I’m proud to have notified Ecuador’s withdrawal from 16 such investment treaties.
Before deciding to abandon its ISDS commitments and extricating itself from those 24 bilateral investment treaties, Ecuador had been on the receiving end of a string of costly compensation awards. In total, foreign investors have presented 29 ISDS claims against Ecuador, half of them related to activities in the extractive sectors (hydrocarbons and mining). In two-thirds of the concluded cases (14 out of 21) Ecuador lost.
In 2008, the global oil and gas services company Perenco, with headquarters in London and Paris, demanded $1.42 billion in compensation — equivalent to 2.27% of Ecuador’s GDP — for trying to impose a windfall tax during a sharp spike in global oil prices. In 2012, a tribunal ordered Ecuador to pay the U.S. oil company Occidental over $1.5 billion, one of the largest amounts a state had ever been ordered to pay. Ecuador contended that the amount of the award represented almost 9% of Ecuador’s 2012 annual budget, 59% of its annual education budget, and 135% of the country’s annual healthcare budget.
Even more controversial was what happened with Chevron-Texaco after an Ecuadorian provincial court ruled in 2011 against the oil company, sentencing it to pay $9.5 billion dollars for contaminating soil and water for decades with its “deliberate dumping of billions of gallons of cancer-causing waste into the Amazon.” Not only was the Ecuadorian court unable to enforce the sentence but Chevron Texaco subsequently brought its own ISDS case against Ecuador.
The resulting arbitration tribunal found in favor of the company and ordered Ecuador to pay millions in damages as well as annul the sentence of the Sucumbíos court, which it considered unlawful. The farce reached full force in October, 2021 when US District Judge Loretta Preska in New York City sentenced Steven Donziger, the human rights lawyer who had filed a lawsuit against Chevron-Texaco decades ago, to six months in prison — following more than two years of house arrest…
Read the full article on Naked Capitalism
Nick Corbishley 