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C O N F I D E N T I A L QUITO 000973 
 
SIPDIS 
DEPT FOR WHA/AND, WHA/EPSC AND EEB/IFD/OIA 
DEPT PLEASE PASS TO USTR FOR BENNETT HARMAN 
 
E.O. 12958: DECL: 2019/11/17 
TAGS: EINV ECON EC
SUBJECT: GOE "EXPLAINS" TERMINATION OF INVESTMENT TREATIES...



id: 235229
date: 11/17/2009 22:43
refid: 09QUITO973
origin: Embassy Quito
classification: CONFIDENTIAL
destination: 09QUITO905|09QUITO938|09QUITO949
header:
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C O N F I D E N T I A L QUITO 000973 
 
SIPDIS 
DEPT FOR WHA/AND, WHA/EPSC AND EEB/IFD/OIA 
DEPT PLEASE PASS TO USTR FOR BENNETT HARMAN 
 
E.O. 12958: DECL: 2019/11/17 
TAGS: EINV ECON EC
SUBJECT: GOE "EXPLAINS" TERMINATION OF INVESTMENT TREATIES 
 
REF: 09 QUITO 905; 09 QUITO 949; 09 QUITO 938 
 
CLASSIFIED BY: Andrew Chritton, Charge, State, Exec; REASON: 1.4(B), 
(D) 
 
Summary 
 
 
 
¶1. (SBU)  Ecuadorian Foreign Minister Falconi explained the 
reasoning behind the GoE's decision to terminate 13 bilateral 
investment treaties (BITs) during a November 12 meeting with 
Embassy representatives of the affected countries.  Falconi 
reiterated the GoE's claim that Ecuador's 2008 Constitution was 
forcing the government's hand, but said the GoE was preparing a 
model to use for negotiation of new investment agreements, which it 
expected to commence in January.  The GoE's new model would limit 
settlement of State-Investor disputes to regional, rather than 
international, arbitration, and eliminate provisions providing 
"national treatment" for foreign investors.  Although the National 
Assembly has not yet responded to the GoE's request to approve 
termination of the BITs, we expect the GoE will eventually receive 
this approval and submit formal notification to terminate the 
U.S.-Ecuador BIT.  End Summary. 
 
 
 
Background 
 
 
 
¶2.  (SBU)  On September 29, 2009, President Correa sent a letter to 
the National Assembly requesting approval to terminate thirteen of 
the country's bilateral investment treaties (BITs).  The affected 
treaties were with: Argentina, Canada, Chile, China, Finland, 
France, Germany, the Netherlands, Sweden, Switzerland, the United 
Kingdom (includes Ireland), the United States, and Venezuela.  The 
GoE did not request approval to terminate BITS with Spain, Italy, 
Peru and Bolivia.  The National Assembly has not yet responded to 
the President's request.  (See Ref A for Post's initial reporting 
on this decision and Ref B for National Assembly President 
Cordero's comments on this process.) 
 
 
 
MFA Scrambling to Minimize Diplomatic Fallout 
 
 
 
¶3.  (SBU)  On November 12, Minister of Foreign Affairs Falconi 
convened a meeting of ambassadors and representatives from those 
Missions with BITs that the GoE plans to terminate.  Falconi opened 
the meeting by apologizing to those Ambassadors whom the MFA had 
been unable to meet with individually, but said the public 
attention the issue was receiving had prompted the MFA instead to 
call quickly a joint meeting.  He said he wanted to explain in 
person the legal and policy reasons for the government's action, 
the transition process, and to assure the affected Missions that 
foreign investment is not unprotected in Ecuador. 
 
 
 
¶4.  (SBU)   Reinforcing what had been conveyed to the Ambassador on 
October 26 by then Acting Foreign Minister Pozo (refA), Falconi 
reiterated that the GoE was obligated under Ecuador's 2008 
Constitution to terminate any treaty that would submit the 
Ecuadorian state to international arbitration in a dispute with a 
private investor.  He asserted that there was no other option. 
Falconi also noted that constitutional provisions, and GoE policy, 
require that foreign direct investment be in alignment with 
Ecuador's National Development Plan. 
 
 
 
¶5.  (SBU)   Falconi took pains to emphasize that foreign investment 
was protected in Ecuador, not only through bilateral investment 
treaties, but by Ecuador's Constitution and legal framework.  Under 
the Constitution, legal security -- even for investment -- was 
considered a human right and arbitration was recognized as a valid 
mechanism for dispute resolution, as long as it was conducted in a 
national or regional forum.  He asserted that Ecuador was 
supportive of foreign investment, but that the country was now 
 
applying an alternative model in which it was seeking social 
justice.   Falconi claimed that under the new model, Ecuador had 
already received important foreign investments from China 
(hydro-electrical project financed by China, ref C) and Venezuela. 
 
 
 
Assembly Approval Expected 
 
 
 
¶6. (C)   On the process and timing of BIT termination, Falconi said 
the National Assembly would make a pronouncement within 15 days on 
President Correa's request for approval to terminate the BITs.   He 
appeared confident that the Assembly's approval would be 
forthcoming.  (Note: National Assembly President Cordero expressed 
some misgivings about terminating the BITs in a November 6 meeting 
with the Ambassador (ref B).  End note.)   An inter-ministerial 
group is developing a new model investment agreement which they 
hope to complete soon.  Through its new investment model, Falconi 
said the GoE seeks to balance the interests of the investor and the 
regulatory role of the State.  He emphasized that the GoE wants to 
 
promote investment, but that private foreign investment was viewed 
as "complementary" to State investment (Constitution Art. 339). 
 
 
 
Decision - Part of Longtime Policy Review 
 
 
 
¶7.  (SBU)   In order to provide context for the GoE's actions, 
Falconi outlined events leading up to Correa's letter to the 
Assembly.  Falconi said review of the country's investment policies 
began before the Correa Administration, noting the work of a COMEXI 
advisory council in 2004 to analyze the commercial and policy 
impacts of the country's existing BITs.  In 2007, a report found 
little correlation between the existence of a BIT and decisions 
made by investors.  Accordng to Falconi, the report concluded that 
issues such as taxation, market size, labor laws, political 
stability and legal security were instead the major determinants of 
investment decisions. 
 
 
 
¶8.  (SBU)   Falconi noted that in 2008 the GoE terminated without 
fanfare nine BITs, which they had determined had not produced 
significant investment flows. Later that year, the GoE decided to 
suspend negotiation of new BITs until a policy was better defined. 
In October 2008, Ecuador's new Constitution was approved. In 
February 2009, Ecuador's Foreign Trade Council (COMEXI) issued 
Resolution 474 which directed the MFA to renegotiate the country's 
BITs, prompting President Correa's letter to the Assembly in 
September.  In July 2009, Ecuador withdrew from the World Bank 
International Center for Settlement of Disputes (ICSID) with the 
aim of maintaining Ecuador's sovereignty and achieving impartiality 
in the settlement of disputes, according to Minister Falconi. 
Falconi explained that BITs with Spain, Italy, Peru and Bolivia 
were not being terminated because the terms of those treaties do 
not allow termination at this time. 
 
 
 
More Details from MFA Advisor 
 
 
 
¶9.  (SBU)   Minister Falconi then turned the meeting over to MFA 
legal advisor, Marco Abuja, and departed.  Abuja claimed the 
administration was working with urgency on its plan to renegotiate 
all the investment treaties out of concern that the existing 
treaties are vulnerable to a constitutional challenge that could 
render them null and void.  On this point, the EU representative 
expressed concern that the Constitution, a document limited to 
internal affairs, could be used to void an international treaty. 
While noting respect for Ecuador's sovereignty, he opined that 
provisions of the Constitution represent internal issues and should 
not affect bilateral treaties. 
 
¶10.  (SBU)   With regard to international arbitration, Abuja stated 
that Article 422 of Ecuador's Constitution does not permit Ecuador 
to enter into international agreements in which the State would be 
subject to rulings by international dispute settlement bodies in 
State-investor disputes.  According to Abuja, the Constitution 
requires that State-investor disputes only be heard before national 
or regional dispute settlement bodies.  Ecuador aims to develop a 
new arbitration mechanism that guarantees equity and equal 
conditions for all parties within UNASUR or ALBA.   Abuja also 
mentioned that the Organization of American States (OAS) is 
considering the establishment of a dispute settlement body in 
Central America or the Caribbean.   Abuja noted that the 
restriction regarding international arbitration did not apply in 
cases of State-State disputes.   After Abuja's presentation, the 
Canadian ambassador commented that Canadian investors were very 
concerned with the GoE's decision and pointed out that it would be 
impossible to negotiate a new investment agreement calling for 
regional arbitration when these regional dispute settlement bodies 
do not yet even exist.  The German ambassador challenged Abuja's 
interpretation of Article 422 claiming that even regional 
arbitration did not appear to extend to nationals that were not 
citizens within Latin American.   Abuja claimed that the GoE 
interpretation of the article was that it applied to investors of 
any nationality.  (Note, the EU representative affirmed during the 
meeting that any new investment agreement would be negotiated 
between Ecuador and the EU, rather than with individual EU member 
states.) 
 
 
 
Timing 
 
 
 
¶11.  (SBU)   Abuja said the MFA plans to terminate (provide written 
notification of intent to terminate) the BITs in January 2010 and 
then immediately start negotiations on the new investment 
agreements.  He also described the GoE's view of the relationship 
between the new investment agreements it hopes to negotiate and the 
existing BITs, which all have provisions that extend protection for 
existing investments for a number of years beyond termination.  He 
described as a "transition period" the time from the GoE's 
notification of termination of an existing BIT until a new 
investment agreement was negotiated and in force. From the GoE's 
perspective, the new investment agreement would replace the BIT, 
rendering it and its international arbitration provisions void. In 
other words, under the MFA's scenario, the existing BITs would not 
be applied for the 10-15 years after termination stipulated in the 
treaties, but only until a new agreement is concluded.  The MFA 
encouraged countries to quickly negotiate new investment agreements 
in order to avoid a lapse in coverage for new investments. 
 
 
 
Arbitration and National Treatment 
 
 
 
¶12.  (SBU)   Abuja detailed the GoE's concerns with, and the 
perceived weaknesses of, current international dispute resolution 
mechanisms.  From the GoE's perspective, international arbitration 
permits legal challenges to Ecuador's public policies in fora 
outside Ecuador's national jurisdiction, contrary to what is 
permitted under Ecuador's 2008 Constitution.  International 
arbitration processes are not transparent and do not provide public 
access to documents in the cases.  Furthermore, ICSID rulings are 
in violation of Ecuador's Constitution in the sense that they are 
final, without any possibility of annulment by another authority. 
Finally, ICSID does not consider Ecuador's Constitution as a 
fundamental norm for its rulings.  Abuja noted that most of 
Ecuador's current BITs specifically identify ICSID as the relevant 
dispute settlement body. 
 
 
 
¶13.  (SBU)   Abuja said "national treatment" provisions would also 
be eliminated in the new investment agreements envisioned by the 
GoE.  As justification, Abuja argued that the principle of 
"national treatment" actually places local investors at a 
disadvantage.  He explained that international dispute resolution 
bodies allow foreign investors to take their cases directly to 
 
ICSID, while local investors must follow the administrative 
procedures in local courts.  Abuja also stated that the 
administration wants to be able to give preference to local 
investors in certain sectors. 
 
 
 
New Arbitration Mechanisms 
 
 
 
¶14.   (SBU)   Abuja outlined aspects of the new regional 
arbitration bodies being considered by UNASUR, ALBA and the OAS, 
such as: application of arbitration procedures only after all 
administrative instances have been exhausted; minimal costs; 
resolution period of 12 months maximum; public list of arbitrators; 
and annulment possible by a superior authority.  From the GoE's 
perspective, in evaluating investment dispute claims, new concepts 
should be considered, such as: standards related to the 
pre-establishment of investment, environmental impact, 
post-establishment of investment, and the defense of human rights; 
the fulfillment of National Development Plan objectives; corporate 
social responsibility; and anticorruption norms. 
 
 
 
Comment 
 
 
 
¶15.  (C)    Although the GoE may find it convenient to claim that 
prior administrations were responsible for initiating the review 
process that has led the government to seek termination of its 
bilateral investment treaties, the Constitution, the primary 
justification for termination of the BITs, is the undisputed child 
of the Correa administration.  The determinant provisions of the 
Constitution reflect the ideology and priorities of this 
government.  Therefore, there is little internal impetus for the 
GoE to seek alternative ways of dealing with the implications of 
the new Constitution regarding foreign investment.  There may be a 
window of opportunity in which the USG and like-minded countries 
can reason with the GoE regarding the negative repercussions that 
are likely should they follow through with their plan.  While 
termination of the BITs is not yet a done deal, we suspect that in 
the end the GoE will get approval from the National Assembly and 
move forward with termination of the BITs, and its efforts to 
negotiate new investment agreements.   At that point, the USG will 
have to decide whether it is preferable to maintain the existing 
BIT through its termination phase plus ten years protection for 
existing investment, or consider the GoE's offer to negotiate a new 
agreement on their terms. 
CHRITTON 

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