Two Big Losers

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Ecuador paid USD 160 million to powerful foreign law firms for them to defend the country and bring claims on its behalf in 25 lawsuits, litigated pursuant to the ICSID’s Convention on the Settlement of Investment Disputes, the United Nations Commission on International Trade Law (UNCITRAL) and before a Court in Florida, several of which Ecuador has lost. Today, Ecuador faces a series of multi-million dollar defeats. The sum of the lawsuits is over USD 11 billion and could result in the State going bankrupt. So far, the government has paid various plaintiffs a figure over USD 330 million and should be prepared to pay a huge bill of close to USD 2.7 billion for the Chevron II and Occidental rulings.

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Focus Ecuador

Diego García and Rafael Correa: Defendants and losers
Diego García Carrión, State Attorney General, is responsible for defending a State which has a myriad of international lawsuits. According to the United Nations Conference on Trade and Development (UNCTAD), Ecuador is the fifth most sued country in Latin America, based on the Bilateral Treaties on Reciprocal Protection of Foreign Investment (BITs). So far, Ecuador has been sued 24 times (12 before the ICSID and 12 pursuant to the UNCITRAL’s arbitration rules). There are also threats of new lawsuits, in which the investor has not yet given notice of the arbitration.

A large part of this information is documented in a comprehensive report which was carried out by the Commission for a Comprehensive Audit of Investment Protection Treaties and of the International Arbitration System on Investments (CAITISA – Spanish Acronym), created by Ecuador and made up of Osvaldo Guglielmino, Cecilia Oivet, Piedad Mancero, Guillermo Moro, Luciana Ghiotto, Federico Suárez and Alexis Mera. The document was presented to the national government in April of 2015. According to the study, 17 of the 24 lawsuits were initiated during the period between 2006 and 2013, which coincides with Rafael Correa’s presidency.

Of the 24 lawsuits, 22 were filed by companies from ‘developed’ countries, especially the United States. Only two correspond to Latin American investors (Bolivia and Argentina). The study shows that some multinational companies have sued the Ecuadorian State several times: Murphy Exploration and Production Company International (three times), Chevron (twice), and Occidental (Oxy) (twice).
The majority of the plaintiffs operate in the oil exploitation sector (12 cases or 50%). The other areas in which many of the plaintiff companies operate include: electricity supply (5 cases or 21%) and mining (3 cases or 12%).

The total amount of the lawsuits: USD 17,764,797,508
Four of the cases (Perenco vs. Ecuador, Burlington vs. Ecuador, and Murphy vs. Ecuador I and II) originate from the application of Law 42-2006, passed by the Congress in April of 2006. This law regulates the hydrocarbon sector and establishes that oil companies should give 50% of the extraordinary profits generated due to the rise in oil prices to the Ecuadorian State.

From the analysis of the 24 BIT cases that Ecuador has had to face, it can de deduced that the State has been sued for USD 17,764,797,508. Regarding the cases that are currently open and in which the court has not yet delivered a final ruling, the amount of the lawsuits comes to USD 11,724,370,000. This figure could be seen to be speculative due to the fact that the established amount of the claim does not mean that the Ecuadorian State will have to pay this amount in the event of an adverse ruling. However, the fact that Ecuador faces lawsuits for these multi-million dollar amounts can create economic uncertainty on a national and international level, according to the study.
Paid: USD 174,897,373

So far, Ecuador has paid four plaintiffs (IBM, Oxy I, Duke Energy, and Noble Energy & Machala Power) the sum of USD 174,897,373 before international courts in cases based on BITs, where the ruling was against Ecuador or where the parties settled. As well as the amount already paid, the State has two multi-million rulings against it: Oxy II for USD 1 billion (according to the final ruling) and Chevron II for USD 96 million. In the Chevron case, all stages of the proceedings have been finalized and an attachment order has been issued by some courts in the United States.

The Isaias case: “Messing” with the law will take its toll
The government of Rafael Correa’s run of bad luck in international courts keeps getting worse. A few days after the final ruling was handed down in the Chevron II case, in which Ecuador was ordered to pay the multinational USD 96 million plus interest (USD 110 million) in compensation, Judge John Thornton in the Eleventh Judicial Circuit Court of Miami-Dade County in Florida rejected the claim that the Ecuadorian State brought for USD 600 million against brothers William and Roberto Isaias, the ex-owners of Filanbanco. If the ruling is upheld on appeal, the ex-bankers could counterclaim against the Ecuadorian State.

The Ecuadorian State brought a claim for embezzlement against the Isaias brothers, who moved to the United States in 2000 after the closure of Filanbanco, in which the brothers were sentenced to 8 years in prison in 2012, which was upheld two years later. Filanbanco is one of the 30 banks that came into the possession of the State between 1998 and 1999, when Ecuador experienced the worst financial crisis in its history.

Confiscation or seizure?
On 8 July of 2008, President Rafael Correa ordered the ex-Deposit Guarantee Agency (AGD – Spanish acronym) to seize the companies in the Isaias Group, proposing that they would be sold, something that so far has not happened. On the contrary, the government has used the seized media outlets as a media base. In 2009, the government extended the claim, through the AGD, to a Court in Florida (USA) hoping to extend the seizure to other goods belonging to the Isaias Dassum family in the United States.

One of the central issues in this case is that the proceedings to seize the assets were carried out with a simple AGD resolution, without a judicial ruling.

According to the government, it ‘seized’ a little over USD 600 million, however, according to the Isaias case website, www.casoisaias.com, Roberto and William Isaias claim a figure over USD 1 billion for 900 ‘confiscated’ assets, companies and media outlets. They claim that the seizure was executed illegally and with a false warrant. This was essentially confirmed by Correa’s ex-Minister for Economy, Fausto Ortiz, who today opposes Correísmo, in an interview with the journalist Carlos Vera. At that time, Ortiz refused to sign the seizure warrant, days after the seizure, and Correa threatened him: “Sign or you go”. Ortiz did not sign and he resigned.

International court rules against Ecuador
On 15 October last, the Florida Court ruled in favor of the Isaias brothers. In the sentence, the indifferent manner in which Ecuador’s defense acted was evident: “While there was substantial evidence presented at trial by the Isaiases that they committed no wrongdoing, did not cause any losses to Filanbanco and were not provided due process in Ecuador; Ecuador has not presented any evidence to the contrary or any contradictory evidence…”

If the ruling is upheld, the court could take an action against the Ecuadorian State for having taken an improper legal action, as the claim was brought outside the statute of limitations.

The real winners: The lawyers
The other great expense for the Ecuadorian State, regardless of whether it wins the trials, are the legal costs of the defense. There are court costs and the cost of legal representation that the State must pay. From 2003-2013, taking the 24 claims into consideration, the total cost of law firms and other arbitration costs is USD 155,929,417, of which 95% corresponds to costs incurred during Rafael Correa’s administration.

Of this amount, USD 11,581,137 corresponds to court fees and costs, and USD 144,348,280 for the fees and expenses of the lawyers who represent the State, hired by the Attorney General’s Office, which is headed by Diego García Carrión. To this figure add the USD 4.1 million from the Isaias case, giving a total of USD 160 million.
Winston & Strawn, the firm that defended the State in the three claims brought by Chevron, were paid close to USD 67 million. The second largest payment went to Dechert LLP, the firm that defended the State in the Oxy, Perenco, and Burlington cases, with close to USD 36 million.

The third group of lawyers who were honored with contracts is the U.S. firm Foley Hoag, with a figure bordering on USD 11 million, according to the 2015 Comptroller’s report. Foley Hoag is connected to the lawyer Paúl Reichler, Rafael Correa’s personal friend. Reichler would have advised Correa to drop the claim against Colombia regarding glyphosate fumigation. Foley Hoag was also involved in an alleged conflict of interest, having advised a subsidiary of Chevron when it was already defending the Ecuadorian State.

The equivalent of 110 schools
The total cost already paid by the State up to 2015 adds up to a figure of USD 330,826,790. This is the same amount that the government hopes to raise annually by eliminating fuel subsidies in the commercial and industrial sector. This amount would build 110 millennium schools, with an average cost of USD 3 million each. For this amount 22,055 preventative health care technicians could be trained, at a cost of USD 15,000 per technician, or 10 mobile hospitals could be bought.

This amount (USD 330,826,790) represents 7% of the total budget for education in 2014, 14% of the total budget for health in the same year, 31% of the budget for social welfare, and 98% of the budget for housing and urban development for this year.

Recusal for conflict of interest
Out of the 24 cases against Ecuador, there have been conflicts of interest which have led to motions for recusal regarding five of the arbitrators. In four of the cases, the motions were brought against the arbitrators nominated by the investor. The conflicts of interest that emerged between the arbitrators in the cases against Ecuador are related to: public statements that indicate bias against the Ecuadorian government or its legal representatives, a close relationship between the arbitrator and the law firm that represents the investor and the arbitrator having acted in other cases where the circumstances were very similar.

In two of these cases (Burlington and Perenco) the motion for recusal was granted, resulting in the removal from the court of the arbitrator in question. In one of the cases (Merck Sharpe) the motion was denied, and the presence of the arbitrator in question in the court was ratified. Finally, in the remaining case (Murphy), the motion for recusal brought by Ecuador was not decided as the recused arbitrator, the Argentinian Guido Tawil, used his right to withdraw from the proceedings “for personal reasons”. The same occurred with the arbitrator Brigitte Stern when the company Merck requested her recusal.

In some cases, the arbitrators’ conflicts of interest did not result in motions for recusal. This seems to have been the situation with the President of the Court in the Oxy vs. Ecuador (II) case, Yves Fortier. In this case, a possible conflict of interest could be envisaged due to his role in multinational companies; however, the Ecuadorian State did not bring a motion for recusal.

Arbitrator and party
Yves Fortier was the President in the Oxy vs. Ecuador (II) case. This case was filed on 17 May of 2006 and the final decision was handed down on 5 October of 2012. As well as his role as arbitrator, between 2002 and 2011, Fortier held different roles on the Board of Directors of the Rio Tinto Alcan mining company. Between 2006 and 2007, in Alcan Fortier worked with Gwyn Morgan, who was president of EnCana up until October of 2006. EnCana is the Company to which Oxy sold 40% of its interest in Block 15 in the Ecuadorian Amazon, thereby violating Ecuadorian law.

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