Investor-state arbitration - ICSID suggests caution in resting treaty claims on disputes over which tribunals can decline jurisdiction - Duke Energy Electroquil Partners & Electroquil S.A. v. Republic of Ecuador.

• Author: Connors, Paul C.
• Position: International Centre for Settlement of Investment Disputes

The International Centre for Settlement of Investment Disputes (ICSID) provides a forum for foreign investors and states to arbitrate disputes regarding foreign investments. (1) In Duke Energy Electroquil Partners & Electroquil S.A. v. Republic of Ecuador, (2) a U.S. energy company and the Ecuadorian energy provider in which it invested submitted claims for breaches of contracts and treaty claims against the Republic of Ecuador (Ecuador) to ICSID. (3) The ICSID Tribunal considered whether Duke Energy Electroquil Partners (Duke Energy) and Electroquil S.A. (Electroquil) were entitled to compensation, and if so, how to value these damages. (4) The Tribunal held that the appropriate method of valuing damages was based on commercial losses incurred by Electroquil and required Ecuador to pay damages to Electroquil based on breaches of its contractual obligations. (5)

In 1992, as a result of a lack of rainfall, Ecuador experienced a national power shortage. (6) In response to this energy crisis, investors created Electroquil, the first private power generator in Ecuador. (7) In 1995, Ecuador and Electroquil entered into a power purchase agreement (PPA 95) for the "importation, assembly, installation and putting into service by Electroquil" of two turbine gas generators to alleviate the power supply problems. (8) To facilitate Ecuador's payments to Electroquil for the fixed energy costs, PPA 95 required that Ecuador establish and execute payments through payment trusts at the Central Bank of Ecuador. (9) By the time Electroquil had begun commercial operation of its plants, Ecuador had not established any of the payment trusts and payments were irregular and partial (late payments). (10)

In mid-1996, Ecuador began imposing fines against Electroquil related to Electroquil's energy supply and its delay in beginning its commercial operations. (11) The following year, the United States and Ecuador entered into a bilateral investment treaty (BIT) calling for reciprocal protection of investments between the two countries. (12) After one of Electroquil's turbines broke down and the company imported a replacement, Ecuador denied Electroquil's request for a customs duties exemption of US$1,008,614 for the replacement turbine. (13)

In May of 2000, Ecuador and Electroquil entered into two mediation and arbitration agreements related to the disputes over the fines and Electroquil's performance during its first year. (14) After local mediation in Ecuador under these agreements failed, Duke Energy and Electroquil entered into another arbitration agreement with Ecuador in April of 2004 to submit their investment disputes to ICSID jurisdiction. (15) Four years later, the ICSID Tribunal held that the appropriate method of valuing damages was based on commercial losses incurred by Electroquil and awarded Electroquil US$5,578,566 plus interest. (16)

During the last two decades of the twentieth century, many countries privatized their public service sectors, attracting considerable foreign investment. (17) To facilitate the inflow of foreign capital, some of these countries entered into agreements with foreign investors. (18) Disputes arising out of these agreements are governed by the contract law of the host state. (19) As another means of attracting foreign capital, some of these countries also signed BITs, which required the countries to provide increased protection to foreign investments. (20) BITs allow foreign investors to submit to international arbitration any disputes that arise between them and the local government regarding their investments, as opposed to proceeding judicially under local law. (21)

For damages analysis under BITs, international law broadly recognizes three standards of reparation for injury: restitution, compensation, and satisfaction. (22) Restitution seeks to reestablish the situation that existed before the wrongful act was committed. (23) Compensation addresses quantifiable financial losses and is only appropriate where restitution does not make the injured party whole. (24) Likewise, satisfaction is the appropriate standard for reparation only where restitution and compensation are inadequate. (25) Regardless of the standard applied, arbitral tribunals attempt to avoid awarding foreign investors damages that would amount to a double recovery. (26)

Despite the basic recognized principles of reparation for injury from internationally wrongful acts, limited arbitral jurisprudence provides guidance on measures of compensation and the appropriate method to quantify it. (27) While some BITs provide guidance for valuing damages when the wrongful act is expropriation, most disputes arise from local government actions that reduce the foreign investors' expected returns, known as indirect expropriation, which typical BITs do not address. (28) While BITs do not address indirect expropriation, several valuation methods exist. (29) Two major approaches to valuing damages for indirect expropriation are the specific damages approach and the generic damages approach. (30) Regardless of the approach taken, the valuation methodology depends on the nature of the asset that has been indirectly expropriated. (31)

The ICSID Tribunal in Duke Energy Electroquil Partners & Electroquil S.A. v. Republic of Ecuador looked to both Ecuadorian law and principles of international law as a starting point for assessing damages. (32) In determining the measure of compensation and proper method of calculating the compensation, the Tribunal applied either Ecuadorian contract law or relevant international law principles, depending on the type of norm breached. (33) The Tribunal then considered potentially overlapping claims so as to avoid double recovery. (34) The Tribunal found that Ecuadorian contract law applied to Ecuador's violations of the PPAs regarding the payment trusts, late payments, and certain fines and penalties because the PPAs were contractual in nature. (35) To value these contractual damages, the Tribunal used the valuation method based on commercial losses incurred by Electroquil. (36)

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