Another Small Emerging Economy Just Dealt Another Big Blow to the Global ISDS System

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.

Rick Claypool, research director for Public Citizen, tweeted that Donziger’s case “perfectly encapsulates how corporate power has twisted the U.S. justice system to protect corporate interests and punish their enemies” — adding that as Donziger was ordered to prison for six months, members of the Sackler family won immunity from opioid lawsuits targeting their private company, Purdue Pharma.

Back in Ecuador: After the Correa government enshrined Article 422 in the new constitution and undertook the arduous work of extricating Ecuador from all two dozen of the bilateral trade agreements it had signed containing ISDS clauses, his presidential successors, Lenin Moreno, Guillermo Lasso and now Daniel Noboa, the son of Ecuador’s richest man, the banana magnate Alvaro Noboa, have made it their job to overthrow the ban and reintroduce arbitration. The Moreno government reapplied to join ICSID and tried, via the Constitutional Court, to return to the bilateral treaties, to no avail.

This is why the rejection of question D of the referendum is so important, says Long:

[It reads:] “Do you agree that the Ecuadorian State should recognize international arbitration (…)?” And the answer was No: a hammer blow to the corruption of the investor-State arbitration system, with national, regional and global repercussions.

A Gathering Global Trend

Currently 165 countries in the world are part of the International Center for Settlement of Investment Disputes (ICSID), but two already withdrew between 2007 and 2009: Ecuador and Bolivia. Then, in February this year Honduras became the first Central American country to announce its departure from ICSID. Weeks later, 30 US representatives and senators signed a letter calling attention to the egregious case of US company Prospera suing Honduras for $11 billion (two thirds of the country’s annual budget) over repeal of a law allowing for private charter cities.

Until now, Latin America has been a hugely lucrative source of income for (mostly Western) corporations seeking legal damages against governments for passing laws or regulations that threaten their bottom line as well as the international arbitration lawyers that argue the cases. From an article I wrote in 2016:

[O]ver the last ten years, the region has been one of the primary sources of their exorbitant fees, which can range from $375 to $700 per hour depending on where the arbitration takes place.

By 2008, more than half of all registered claims at the International Centre for Settlement of Investment Disputes (ICSID) were pending against Latin American countries. In 2012, around one-quarter of all new ICSID disputes involved a Latin American state.

But countries in Latin America and elsewhere, including even Europe, are gradually turning their back on ISDS. Some never bothered in the first place, including two of the BRICS founder nations, India and Brazil, as notes a letter signed by 100 international organisations urging Ecuadorians not to vote for question D:

Brazil, which does not have any investment protection treaties, is the main recipient of foreign investment in the region. India has exited all of its investment treaties, and currently signs treaties that do not include the traditional ISDS mechanism. Still, India is the fifth largest recipient of investment in the world.

In the last 10 years, we have seen many governments move away from this mechanism. Countries, such as South Africa, Indonesia, Australia, New Zealand and Bolivia, have exited or renegotiated their investment treaties and no longer negotiate ones that include the ISDS mechanism. In fact, many European countries and the EU itself have recently announced their intention to withdraw from an ISDS treaty called the Energy Charter Treaty (ECT) or have already left it. The ISDS mechanism included in the ECT protects investors in the energy sector, and is being used by fossil fuel corporations to slow down the energy transition.

In the US, President Biden has followed through with his commitment to exclude ISDS clauses from any new trade agreements. But “dozens of existing U.S. trade and investment agreements still retain the ISDS mechanism… [and] thus continue to enable private companies to challenge public interest policies, resulting in squandered tax revenue and regulatory chill,” notes a letter to the White House signed by 300 professors of law and economics.

One of the signatories was the Nobel laureate Joseph Stiglitz, who wrote:

“Ecuador was a world leader in rejecting international investment arbitration that perpetuate what is often quite rightly referred to as ‘corporate colonialism. Now, even the countries that initially promoted the system, including the European countries and even the United States, have taken measures to distance themselves from international arbitration.”

Canadian Mining Connection

The Ecuadorian public’s rejection of the proposal to bring back ISDS — part of a referendum consisting of 11 questions, including on security matters — could upset the ultra neo-liberal Noboa government’s plan to open the country wide open to global mining interests. In early March, President Daniel Noboa and some of his senior ministers visited Canada, the largest mining investor in Ecuador, to attend one of the largest mining fairs in the world, the Prospectors & Developers Association of Canada (PDAC) in Toronto. From Radio Canada International (machine translated):

During his speech at the annual meeting of mining prospectors and investors, Daniel Noboa highlighted the rich geological potential of Ecuador. He emphasized the “importance of transparency, environmental management and social responsibility” in the extractive industry, assuring investors of Ecuador’s dedication to fostering a mutually beneficial partnership.

The Ecuadorian presidency said that President Noboa’s participation in the event reflects Ecuador’s proactive approach to engaging with global mining.

The government signed contracts for six projects worth more than $4.8 billion, an amount never before seen in the country. The Ecuadorian and Canadian governments have repeatedly reiterated their interest in signing a bilateral investment treaty (BIT) over the past two years. Such an agreement would naturally include ISDS clauses, which, of course, is not possible by Ecuadorian law. Which is why the Noboa government was so keen to include a question about reigniting Ecuador’s adherence to ISDS clauses in a referendum ostensibly about security matters. From InDepthNews:

Addressing parliamentary meetings [in Ottawa] about [the possible BIT], Canada’s ambassador to Ecuador said, “The government of Ecuador wants ISDS as part of this agreement,” while a Canadian Foreign Ministry official said investment is a “particular area of interest,” and ISDS “is a key interest for Canadian industry stakeholders,” as it “has proven to be an investment attraction vehicle.”…

As we reported in February 2023, Canadian companies have been engaging in unsavoury practices in Latin America for a long time. A landmark report published by the Project for Justice and Corporate Responsibility in 2016 found that 28 Canadian companies were implicated in forty-four deaths, 403 injuries, and 709 criminalization cases in thirteen Latin American countries over a fifteen-year period. Indigenous groups in Ecuador, as in neighbouring Peru, have organised waves of protests over the past two years over Canadian mining activities. According to the RCI article, they are also drawing criticism in Ecuador and Canada:

In a growing diplomatic and environmental standoff, opposition in Canada is intensifying against Canadian mining operations in Ecuador. Concerned citizens, environmentalists and indigenous groups have come together to denounce the alleged ecological damage and human rights violations associated with Canadian mining companies in the South American country.

The central point of this opposition is the controversial presence of Canadian mining companies, whose operations in Ecuador have sparked outrage. Critics maintain that the corporations’ activities are primarily focused on gold and copper extraction, causing significant environmental degradation, such as deforestation, water pollution and habitat destruction.

On February 13, Amnesty International Canada testified before the House of Commons Standing Committee on International Trade as part of its study of free trade negotiations between Canada and Ecuador. At the hearing, Amnesty International Canada drew attention to a persistent pattern of serious human rights violations in Ecuador and called for measures to be taken to ensure that any free trade agreement between the two countries was compatible with Canada’s international human rights obligations.

Ironically, senior Canadian officials have also singled out ISDS for criticism in the past. In 2018, during a speech about the renegotiated NAFTA, then foreign minister (now deputy prime minister and finance minister, not to mention World Economic Forum trustee) Chrystia Freeland said: “ISDS elevates the rights of corporations over those of sovereign governments. In removing it, we have strengthened our government’s right to regulate in the public interest, to protect public health and the environment.” As always, what is good for the North is too good for the South.