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Waiting period enforced in investment treaty dispute

22 December 2010

In a cautionary tale, an ICSID Tribunal has declined jurisdiction over an investment treaty dispute between oil company, Murphy, and the Republic of Ecuador.

This is because the claimant failed to observe a "cooling-off" period before commencing arbitration designed to afford parties an opportunity to resolve their disputes amicably.

An ICSID Tribunal hearing a dispute between Murphy Exploration and Production Company International (Murphy) and the Republic of Ecuador (Ecuador) under the Ecuador-United States bilateral investment treaty (the BIT) has concluded that a waiting period in the dispute settlement arrangements of an investment treaty "constitutes a fundamental requirement that a Claimant must comply with… before submitting a request for arbitration under the ICSID rules".  The Tribunal dismissed Murphy's claims because it failed to adhere to the waiting period prior to commencing arbitration.

The dispute concerned rights under a service contract between a consortium of oil companies and Ecuador for the exploration of a block in the Ecuadorian Amazon.  Murphy indirectly held a 10% stake in the consortium through a wholly owned subsidiary.  In 2006, Ecuador passed Law 42, which amended the Ecuadorian Hydrocarbons Law to require contractors to pay the State 50% (later increased to 99%) of the surplus income arising from the difference between the market price of oil and the benchmark price prevailing at the date the contract was concluded.  Ecuador subsequently made demands for payment of sums alleged to be owing pursuant to Law 42.

Ecuador entered into negotiations to amend the service contract with Repsol, the consortium leader, in which Murphy's subsidiary participated also.  However, Murphy notified Ecuador of the existence of a dispute under the BIT on 29 February 2008 and initiated ICSID arbitration proceedings on 3 March 2008.  It sold its interest to Repsol, but sought compensation from Ecuador in the arbitration for past losses incurred as a result of alleged violations by Ecuador of its BIT obligations.  Ecuador raised objections to jurisdiction, which the Tribunal resolved to determine first.  In its Award dated 15 December 2010 declining jurisdiction the Tribunal made two substantial contributions to ICSID jurisprudence.

Irrevocable nature of consent to arbitration

First, the Tribunal considered Ecuador's notification to ICSID on 4 December 2007 that it "will not consent" to ICSID arbitration about matters concerning investments in its natural resources sector, and that any instrument expressing Ecuador's previously expressed intentions "which has not been perfected by the express and explicit consent of the other party prior to the date of submission of the present notification is hereby withdrawn".  The Tribunal held that, as a matter of scope, this notification related only to disputes that Ecuador might consent to submit to ICSID in the future.  The Tribunal held that the notification was ineffective in relation to dispute settlement arrangements in investment protection treaties to which Ecuador was a party, since treaties may not be unilaterally amended in this way.

Failure to comply with the waiting period fatal to claims

However, in relation to the second key issue, the Tribunal, by a majority (Mr Rodrigo Blanco, President, and Dr Raul Vinuesa), dismissed Murphy's claims for lack of jurisdiction because Murphy failed to comply with the six month waiting requirement in Article VI of the BIT.  This provision states that "six months [must] have elapsed from the date on which the dispute arose" before it can be submitted to arbitration.  Murphy had argued that Article VI was a procedural rule which could not act as a bar to the Tribunal's jurisdiction.  It also insisted that the "waiting period runs from the date on which the Republic of Ecuador became aware of the dispute, not from the date on which Murphy International formalised its claims", on which basis more than six months had elapsed by the time the arbitral proceedings commenced.

The Tribunal rejected Murphy's interpretation and dismissed the claim, holding that whilst Article VI did not impose any particular formalities, "as long as no allegation of Treaty breach is made, no dispute will have arisen giving access to arbitration" (affirming the previous decision of Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/05/5, Decision on Jurisdiction, 2 June 2010).  The waiting period only commenced once Murphy notified Ecuador of the existence of a dispute relating to an alleged breach of the BIT on 29 February 2008, which plainly had not expired by the time the proceedings were commenced three days later.  (Dr Horacio Grigera Naón, Murphy's appointed arbitrator, dissented in part, finding that a clear difference had arisen between Ecuador and Murphy in 2006.)  The fact that Repsol had notified Ecuador of the existence of a dispute under a different investment treaty was of no benefit to Murphy.  Negotiations between the consortium and Ecuador did not qualify for the purposes of Article VI, since Murphy was not a direct participant in them and they did not relate to Murphy's claims under the BIT.

The majority also rejected Murphy's claim that negotiations would have proved futile stressing instead that the "obligation to negotiate is an obligation of means, not of results.  There is no obligation to reach, but rather try to reach, an agreement.  To determine whether negotiations would succeed or not, the parties must first initiate them".  It could not simply be asserted that negotiations would have been futile, especially when some oil companies had achieved settlements with Ecuador.  Murphy's decision not to attempt to resolve its dispute through negotiations before commencing arbitration violated Article VI.

Lastly, the majority departed from a line of previous decisions (Ronald S. Lauder v. The Czech Republic, UNCITRAL, Award, 3 September 2001; SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13, Decision on Jurisdiction, 6 August 2003) in denying any meaningful legal distinction between merely "procedural" and "jurisdictional" preconditions to arbitration.  It held that waiting periods are not inferior commitments but constitute "an essential mechanism" which the parties must engage in good faith before resorting to arbitration.

Comment: This award will not escape criticism.  Dr Grigera Naón criticised the majority's decision for impairing Murphy's "right to access arbitral justice" and failing to recognise the futility of negotiations.  Others will point to the wasted resources it entails and the reality that Murphy is entitled to commence proceedings afresh, following the appropriate passage of time.  Of course, it might be said that any wasted time and expense was the product of the claimant's own choices, but other tribunals have not required such action, especially when the issue fell to be decided not just months but years after the commencement of proceedings.  However, the Tribunal's conclusion is a clear illustration that even seemingly innocuous procedural rules when openly disregarded can have serious consequences for the defaulting party.  For this Tribunal at least it is clear that waiting periods are not an inconsequential procedural requirement but rather a key component of the legal framework established in an investment protection treaty, which should be disregarded only in exceptional circumstances.