Following the filing of written pleadings on the jurisdictional objections, the Tribunal held a hearing at the premises of the LCIA in London on 5 January 2004, The Parties were represented as follows:
For the Claimant :
Mr Michael Barrack
Mr Riyaz Dattu
McCarthy Tétrault LLP
Box 48, Suite 4700, Toronto Dominion Bank Tower,
Toronto, Ontario, Canada M5K 1E6
Mr Barry Gilchrist, EnCana, Vice-President, Commercial Services
Mr John Keplinger, EnCanEcuador, General Manager
Mr John V Harries, QC, Senior Legal Advisor, Offshore & International Operations, Encana Corporation
For the Respondent :
Mr Eric Ordway
Mr Charles E Roh, Jr
Weil, Gotshal &Manges, LLP
2 Rue De La Baume,
Paris 75008, France
Mr Augustin Hurtado Larrea, Bustamante & Bustamante,
Ms Elsa De Mena, Director General, Servicio de Rentas Internas
Article XIII of the BIT provides in part as follows:
Settlement of Disputes between an Investor and the Host Contracting Party
1. Any dispute between one Contracting Party and an investor of the other Contracting Party, relating to a claim by the investor that a measure taken or not taken by the former Contracting Party is in breach of this Agreement, and that the investor has incurred loss or damage by reason of, or arising out of, that breach, shall, to the extent possible, be settled amicably between them.
2. If a dispute has not been settled amicably within a period of six. months from the date on which it was initiated, it may be submitted by the investor to arbitration in accordance with paragraph (4), For the purposes of this paragraph, a dispute is considered to be initiated when the investor of one Contracting Party has delivered notice in writing to the other Contracting Party alleging that a measure taken or not taken by the latter Contracting Party is in breach of this Agreement, and that the investor has incurred loss or damage by reason of, or arising out of, that breach.
3. An investor may submit a dispute as referred to in paragraph (1) to arbitration in accordance with paragraph (4) only if:
(a) The investor has consented in writing thereto;
(b) The investor has waived its right to initiate or continue any other proceedings in relation to the measure that is alleged to be in breach of this Agreement before the courts or tribunals of the Contracting Party concerned or in a dispute settlement procedure of any kind;
(c) If the matter involves taxation, the conditions specified in paragraph 5 of Article XII have been fulfilled; and
(d) Not more than three years have elapsed from the date on which. the investor first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that the investor has incurred loss or damage,
4. The dispute may, at the election of the investor concerned, be submitted to arbitration under:
(a) The International Centre for the Settlement of Investment Disputes (ICSID), established pursuant to the Convention on the Settlement of Investment Disputes between States and Nationals of other States, opened for signature at Washington 18 March, 19651 (ICSID Convention), provided that both the disputing Contracting Party and the Contracting Party of the investor are parties to the ICSID Convention;
(b) The Additional Facility Rules of ICSID, provided that either the disputing Contracting Party or the Contracting Party of the investor, but not both, is a party to the ICSID Convention;
(c) An international arbitrator or ad hoc arbitration tribunal established under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL),
5. Each Contracting Party hereby gives its unconditional consent to the submission of a dispute to international arbitration in accordance with the provisions of this Article,
12. (a) A claim that a Contracting Party is in breach of this Agreement, and that an enterprise that is a juridical person incorporated or duly constituted in accordance with applicable laws of that Contracting Party has incurred loss or damage by reason of, or arising out of, that breach, may be brought by an investor of the other Contracting Party acting on behalf of an enterprise which the investor owns or controls directly or indirectly, ba such a case:
(i) Any award shall be made to the affected enterprise;
(ii) The consent to arbitration of both the investor and the enterprise shall be required;
(iii) Both the investor and enterprise must waive any right to initiate or continue any other proceedings in relation to the measure that is alleged to be in breach of this Agreement before the courts or tribunals of the Contracting Party concerned or in a dispute settlement procedure of any kind; and
(iv) The investor may not make a claim if more than three years have elapsed from the date on which the enterprise first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that it has incurred loss or damage.
(b) Notwithstanding subparagraph 12(a), where a disputing Contracting Party has deprived a disputing investor of control of an enterprise, the following shall not be required:
(i) A consent to arbitration by the enterprise under I2(a)(ii); and
(ii) A waiver from the enterprise under 12(a)(iii),"
Article I sets out certain definitions;
"(b) ‘Enterprise’ means
(i) Any entity constituted or organized under applicable law, whether or not for profit, whether privately-owned or govemmentally-owned, including any corporation, trust, partnership, sole proprietorship, joint venture or other association; and
(ii) A branch of any such entity;
(g) ‘Investment’ means any kind of asset owned or controlled either directly, or indirectly through an investor of a third State, by an investor of one Contracting Party in the territory of the other Contracting Party in accordance with the latter’s laws and, in particular, though not exclusively, includes:
(i) Movable and immovable property and any related property rights, such as mortgages, liens or pledges;
(ii) Shares, stock, bonds and debentures or any other form of participation in a company, business enterprise or joint venture;
(iii) Money, claims to money, and claims to performance under contract having a financial value;
(v) Intellectual property rights ;
(vi) Rights, conferred by law or under contract, to undertake any economic and commercial activity, including any rights to search for, cultivate, extract or exploit natural resources, but does not mean real estate or other property, tangible or intangible, not acquired in the expectation or used for the purpose of economic benefit or other business purposes.
Any change in the form of an investment does not affect its character as an investment,
(h) ‘Investor’ means In the case of Canada;
(i) Any natural person possessing the citizenship of or permanently residing in Canada in accordance with its laws; or
(ii) Any enterprise incorporated or duly constituted in accordance with applicable laws of Canada, who makes the investment in the territory of the Republic of Ecuador; and
In the case of the Republic of Ecuador:
(i) Any natural person who is a national of Ecuador pursuant to its legislation; or.
(ii) Any enterprise organized in accordance with the laws and regulations of Ecuador, with domicile in the territory of Ecuador who makes the investment in the territory of Canada and who does not possess the citizenship of Canada;’’,
"It is clear that Ethyl has consented to this arbitration by the very act of commencing it. Normally such act is taken as consent to the arbitration thereby initiated."6
In the course of oral argument the Claimant clarified that the present arbitration is not brought by it on behalf of its two subsidiaries under Article XIII(12)(a). The reason is obvious enough: the subsidiaries are Bermudan, not Ecuadorian corporations. Article XIII(12) only applies to claims for loss to "an enterprise that is a juridical person incorporated or duly constituted in accordance with applicable laws of’ the Respondent State. The Claimant brings these proceedings in its own right as an investor, on the basis that it holds assets in Ecuador "indirectly through an investor of a third State’’, i.e. through its Bermudan subsidiaries (see the definition of "investment" in Article 1(g)). It might be thought anomalous that subsidiaries incorporated in the host State must waive local remedies while subsidiaries incorporated in a third State need not do so. This may have been why the subsidiaries have themselves acted in accordance with the waiver by terminating local proceedings. But the contrast between the language of Article XIII(12)(a) and Article I(g) is clear and must be respected. The waiver or discontinuance of further proceedings by AEC and Oriente was not necessary in terms of the BIT, and it has no relevance so far as concerns the Tribunal’s jurisdiction over these proceedings.
SGS Société Générale de Surveillance S.A. v. Republic of the Philippines (ARB 02/06), decision of 31 January 2004, para, 26, citing Case concerning Oil Platforms. Islamic Republic of Iran v. United States of America, ICJ Reports 1996 p. 803 at 810 (para. 16).
Fourthly, the tribunal should definitively resolve jurisdictional issues if it is possible to do so at the preliminary stage. In the words of Article 21(4) of the UNCITRAL Rules:
"In general, the arbitral tribunal should rule on a plea concerning its jurisdiction as a preliminary question. However, the arbitral tribunal, may proceed with the arbitration and rule on such a plea in their final award."
Reasons for joining jurisdiction to the merits may include the existence of factual disputes relevant to issues of legal characterisation and thus to jurisdiction. But a respondent should only be required to go to the cost and expense of defending the merits of a claim (in a case where jurisdiction has not yet been established) if there is a reasonable prospect that jurisdiction will be held to exist. In this regard the injunction as to costs in Article 40(1) of the UNCITRAL Rules takes on additional significance,
Moreover Ecuador says that the dispute concerns taxation measures and as such is exempted from the scope of the BIT by Article XII(1) unless it involves either the breach of an agreement with a central government authority of the host State (Article XII(3)) or conduct tantamount to expropriation (Article XII(4)). The Claimant does not allege breach of an agreement covered by Article XII(3), and although it does allege an expropriation, in the Respondent’s view the latter claim is unsustainable on the facts and should be dismissed forthwith. The Respondent concludes that the Tribunal lacks subject matter jurisdiction over the Claimant’s case in its entirety.
Before addressing these issues it is necessary to set out the relevant provisions of the BIT, which are as follows:
For the purpose of this Agreement:
(i) ‘Measure’ includes any law, regulation, procedure, requirement, or practice;...
Establishment, Acquisition and Protection of Investments
2. Each Contracting Party shall accord investments or returns of investors of the other Contracting Party:
(a) Fair and equitable treatment in accordance with principles of international law, and
(b) Full protection and security.
1. Investments or returns of investors of either Contracting Party shall not be nationalized, expropriated or subjected to measures having an effect equivalent to nationalization or expropriation (hereinafter referred to as ‘expropriation’) in the territory of the other Contracting Party, except for a public purpose, under due process of law, in a nondiscriminatory manner and against prompt, adequate and effective compensation. Such compensation shall be based on the genuine value of the investment or returns expropriated immediately before the expropriation or at the time the proposed expropriation became public knowledge, whichever is the earlier, shall be payable from the date of expropriation at a normal commercial rate of interest, shall be paid without delay and shall be effectively realizable and freely transferable.
1. Except as set out in this Article, nothing in this Agreement shall apply to taxation measures,
2. Nothing in this Agreement shall affect the rights and obligations of the Contracting Parties under any tax convention. In the event of any inconsistency between the provisions of this Agreement and any such convention, the provisions of that convention apply to the extent of the inconsistency.
3. Subject to paragraph (2), a claim by an investor that a tax measure of a Contracting Party is in breach of an agreement between the central government authorities of a Contracting Party and the investor concerning an investment shall be considered a claim for breach of this Agreement unless the taxation authorities of the Contracting Parties, no later than six months after being notified of the claim by the investor, jointly determine that the measure does not contravene such agreement.
4. Article VIII may be applied to a taxation measure unless the taxation authorities of the Contracting Parties, no later than six months after being notified by an investor that he disputes a taxation measure, jointly determine that the measure is not an expropriation.
5. If the taxation authorities of the Contracting Parties fail to reach the joint determinations specified in paragraphs (3) and (4) within six months after being notified, the investor may submit its claim for resolution under Article XIII."
Transcript, 5 January 2004, 48,
For these reasons the Tribunal is not satisfied that it has sufficient material before it to enable it to definitively decide the disputed issue of characterisation on which its jurisdiction depends. To put it another way, it is arguable that at least certain aspects of the claim are not exempted from the scope of the BIT by Article XII(1), yet on the material available to it the Tribunal is not able to determine whether or to what extent this is so. In these circumstances the Tribunal does not think it desirable to discuss the meaning of the relevant provisions in detail, and in particular the meaning of the term "taxation measures" in Article XII(1). These must be a matter for subsequent briefing and argument.
Nor does the Tribunal think that it should express any view on the Claimant’s alternative argument, which is that even if the dispute falls entirely within the scope of Article XII(1), the conduct of the Respondent is tantamount to expropriation and thus falls within the scope of the BIT by reason of Article XII(4). It notes that according to at least one definition of indirect expropriation, there is a close connection between that concept and the "reasonably-to-be-expected economic benefit" which would flow from an investment in given circumstances.14 It notes further that VAT in Ecuador, although charged at a rate which is well within the normal range for that tax internationally, is charged on inputs not profits, and that within the context of a VAT system a refusal to allow VAT rebates on inputs is capable of having a disproportionate effect on an enterprise. Whether or not that is true in the present case may be doubted, as the Respondent notes. But the impact of a measure as discriminatory or as tantamount to expropriation does not necessarily depend on the overall profitability of the enterprise in question—and certainly not for jurisdictional purposes. In a case where the fundamental issue of characterisation must anyway be dealt with as part of the merits, it is appropriate in the Tribunal’s view to deal with all issues of combined jurisdiction and merits at the same time and as part of the same process.15
The Respondent did not argue that, even if the Claimant is right on the issue of characterisation, nontheless no issue is raised as to the application of Article II(2) of the BIT.
(a) The Respondent’s objection that the Claimant did not consent to the present proceedings pursuant to Article l3(3)(a) of the BIT is rejected;
(b) The Claimant shall serve on the Respondent within 30 days of this decision a waiver duly executed by the appropriate corporate officer of EnCana Cororation which complies with Article 13(3)(b) of the BIT;
(c) Pursuant to Article 21(4) of the UNCITRAL Rules, the remaining jurisdictional issues art joined to the merits.