Protecting Latin American Investments

The Venezuelan energy minister has declared: “Arbitration is over.” Why should companies doing business in Venezuela and Latin America care? Because the availability of reliable dispute mechanisms minimizes the risks of doing business across borders, particularly in a region known for unpredictable courts and the difficulty of enforcing judgments.

At first blush, recent developments would seem to suggest that the minister’s warning is correct. Venezuela and other countries are changing their contracts and concessions with foreign investors to exclude arbitration. Bolivia and Ecuador may renegotiate the investment treaties that provide substantive rights to foreign investors. Bolivia has denounced its ratification of the International Centre for Settlement of Investment Disputes (ICSID) convention, which provides for a World Bank arbitration procedure in the resolution of foreign investment disputes. And now Ecuador wants to exclude oil, gas, and mining disputes from ICSID arbitration.

These declarations and developments recall a period of Latin American hostility toward foreign investment and neutral mechanisms for resolving investment disputes. Indeed, until little more than a decade ago, the prevailing policy toward foreign investment disputes was embodied in the nineteenth century Calvo Doctrine, named for an Argentine diplomat. That doctrine holds, in short, that jurisdiction in international commercial disputes lies within the country in which the investment is located.

Dramatic change came in the 1990s as Latin American economies liberalized and states agreed to new mechanisms for dispute resolution. They collectively ratified almost 400 bilateral investment treaties (BITs) and free-trade agreements, such as NAFTA and most recently CAFTA, which incorporated investment protection chapters. Most of them also ratified the ICSID Convention.

The legal framework for arbitration in Latin America is reflected in a Compendium of Latin American Arbitration Law that I have compiled over many years with my colleagues in the international arbitration group at White & Case. The Compendium indicates the entry into force of laws and treaties related to investment arbitration as well as commercial arbitration. 

The combination of a legal framework for investment disputes and subsequent frustrations of foreign investors led to an explosion in Latin American investment arbitration. Out of 254 ICSID arbitrations filed in four decades, only 25 percent of the concluded cases were brought against Latin states; now over 50 percent of ICSID cases are pending against Latin American states. Venezuela, for instance, has ratified 22 BITs and faced a number of ICSID cases, including most recently claims by Exxon Mobil Corp. and ConocoPhillips relating to oil-production facilities and assets.

The volume of cases has caused concern in some capital cities, and raised policy questions about investment treaties. Do they in fact promote investment and do they as a practical matter protect investors? Is treaty arbitration fair and unbiased?

A careful assessment of the Latin American treaty cases before ICSID provides a useful backdrop for this debate. ICSID registered the first request for arbitration against a Latin American state in the Santa Elena v. Costa Rica case (White & Case advised on that case.).  There have now been a total of 40 ICSID cases concluded against Latin American states, a significant pool that informs our understanding of investment disputes.

Out of those 40 ICSID cases, 15 were settled or discontinued at the request of one of the parties; 5 were dismissed on jurisdiction, and 20 were decided on the merits. Of the 15 settled, eight were against Argentina, mainly involving energy and infrastructure projects.

The five cases dismissed on jurisdictional grounds include one against El Salvador. In that case, the Tribunal found that the claimant’s “investment was made in a manner that was clearly illegal.” In another case, which involved a pasta factory near Peruvian wetlands, the Tribunal acknowledged judicial irregularities in the Peruvian courts, as the claimant alleged, but dismissed it nonetheless based on the non-retroactive nature of the BIT.

Twenty of those 40 cases have been decided by ICSID Tribunals on their merits. In five cases, the claims were dismissed in their entirety. The remaining 15 have been decided with at least some of the claims alleged being granted by the Tribunal.

Notably, in cases decided on merits, 70 percent of claims for a breach of “fair and equitable treatment” have been successful. In contrast, only 30 percent of claims for expropriation have been successful. The most recently decided case against a Latin American state is Sempra v. Argentina, where the Tribunal held that Argentina had breached the standard of fair and equitable treatment and the umbrella clause under the relevant BIT. The Tribunal awarded $128 million in damages.

As for damages, claimants have been awarded far less than the amounts sought.  Compensation requests have averaged about $250 million; awards have on average been in the neighborhood of $70 million.

The wide range of these outcomes illustrates the maturation of a system that aims to promote legal certainty for foreign investment. They tell us that reports of the demise of arbitration, while dramatic, may be overstated because the reality is more nuanced. The legal framework put into place over many years is not quickly deconstructed. Significantly, troubling developments in a few markets have not stopped the ratification of additional investment treaties.

In addition, the growth of commercial arbitration across Latin America continues apace.  While most Latin American countries have ratified the New York Convention on the enforcement of international arbitration awards, there are no treaties governing, for instance, the enforcement of a New York judgment in Latin American courts.  While some Latin American courts have made and will make markedly bad decisions that appear to undermine arbitration, many other courts are showing appropriate respect for private dispute resolution through arbitration.

In this broader context, it is noteworthy to recall an era without investment arbitration. Years ago, a highly regarded Peruvian contracts professor told me in Lima, “to know foreign investment in Peru, you must know the oil fields of La Brea y Pariñas.” He was right. Almost 90 years ago, Peru consented to a special arbitration proceeding regarding its treatment of investment in those fields. Thirty years ago, Peru again faced an investment dispute relating to those oil fields. It handled the dispute through negotiations that lacked transparency and led to a settlement. When details leaked out, the political upheaval contributed to the fall of the democratically elected government and the emergence of a military regime. Peru now has ratified numerous investment treaties and participates in various investment arbitrations.

Viewed historically, and given the extensive legal and treaty framework in place supporting arbitration, it may be unlikely that disciples of the Calvo Doctrine will ever be able to put the arbitration genie fully back into a bottle.

Jonathan C. Hamilton is a partner based in the Washington, DC office of the global law firm of White & Case LLP. After commencing his career in the Firm's New York office, he spent several years in its Mexico City office. He has focused on Latin American dispute resolution for a decade and advised on matters involving more than 15 jurisdictions across Latin America. He can be contacted at: jhamilton@whitecase.com

White & Case is a leader in Latin American arbitration. Our International Arbitration Group comprises more than 140 lawyers around the world, including dozens of lawyers fluent in Spanish or Portuguese. The Group was named International Arbitration Team of the Year at the Chambers USA Awards for Excellence 2007 and is ranked Tier One by Chambers USA, Legal 500 USA, The American Lawyer Scorecard and Benchmark: The Definitive Guide to America's Leading Lawyers.

Read more in International Disputes Quarterly.