Ad Hoc Committee Issues Decision on Annulment in M.C.I Power Group L.C. and New Turbine Inc. v. Republic of Ecuador

Background

US Companies, M.C.I Power Group and New Turbine (hereinafter “Claimants”) owned and controlled US company Seacoast, Inc.  On November 1995, Seacoast entered into a contract for the sale of electricity (“Seacoast Contract”) with Ecuador’s Electricity Institute (INECEL).  

On April 1996, after a series of differences between Seacoast and INECEL regarding the execution of the Seacoast Contract, Seacoast suspended the operation of the electricity plants and delivery of power alleging the non-payment by INECEL of invoiced amounts payable under the contract. Subsequently, on May 1996, INECEL declared the Seacoast Contract terminated. 

On December 2002, after failed litigation before Ecuadorian courts, Claimants filed a request for ICSID arbitration against Ecuador alleging they invested before and after the US – Ecuador BIT (hereinafter “the BIT”) entered into force on May 1997.  Claimants claimed Ecuador’s breach of its BIT obligations including the umbrella clause,[1] national treatment, most favored national treatment, non discriminatory measures, and expropriation.  

Ecuador raised objections to the jurisdiction of the Tribunal stating the non retroactive effect of the BIT.  Ecuador alleged that the BIT was not retroactive since when the BIT came into force Claimants had no investments in Ecuador because the Seacoast Contract was terminated in May 1996 and they had sold their interests.  The Tribunal affirmed Ecuador’s non-retroactivity objection and rejected all of the Claimants’ claims.

On November 2007, Claimants filed an application for annulment of the award under Article 52 of the ICSID Convention alleging that the Tribunal had manifestly exceeded its powers (Art. 52(1)(b)) and the award failed to state the reasons on which it was based (Art. 52(1)(e)).  Claimants alleged that if not annulled the award would create a “divide between international investment law and well-settled international law on the point of the retroactive application of treaties and create false and dangerous precedents.” 

Analysis

(a)   Article 52(1)(b) - Manifest Excess of Powers

The Committee recognized that the main jurisdictional question raised by Ecuador before the Tribunal concerned the effect of the BIT on events alleged to be prior and subsequent to its entry into force.  The Committee pointed out that the BIT did not contain any retroactivity provision apart from Article XII(1), which provided that the Treaty “shall apply to investments existing at the time of entry into force as well as to investments made or acquired thereafter.”

Claimants’ alleged that the Tribunal manifestly exceeded its powers by failing to apply the proper law when it refused jurisdiction over the accounts of the Seacoast Contract under the BIT, since according to Claimants the disputed facts continued after the entry into force of the BIT. Also, Article 28 of the Vienna Convention on the Law of Treaties[2] only prohibited a Tribunal’s ability to examine a conduct that took place before the entry into force if such conduct ceased to exist before the entry into force of the treaty. 

The Committee mentioned the Tribunal’s conclusion that Ecuador’s acts and omissions did not constitute continuing and composite acts that continued taking place after the BIT became in force, and instead Ecuador’s refusal to pay the alleged accounts was an instantaneous act that took place before the entry into force of the BIT.

The Committee stated that in any case, what was required for an annulment under Article 52(1)(b) “was a manifest excess of powers which should be understood as a tantamount to a safety valve allowing for the rejection of arbitrary or unreasonable decisions.”[3]  Citing Lucchetti[4], the Committee indicated that a decision providing for no jurisdiction may result in a manifest excess of powers “when the Tribunal has acted outside the proper bounds of its competence.”[5]  The Committee highlighted that a manifest excess of powers argument required a higher degree of proof than a searching analysis of the findings of the Tribunal.

The Committee held that in the present case, although the refusal by the Tribunal to exercise jurisdiction over the disputed accounts could be subject to debate, and although another solution could have been possible, the Committee did not find any severe violation of the law by the Tribunal.  Accordingly, the Committee concluded that Claimants did not show that the Tribunal manifestly exceeded its powers when it did not exercise jurisdiction over the accounts under dispute.

(b)   Article 52(1)(e) – Failure to State Reasons

With respect to the award’s failure to state reasons on which it is based, the Committee indicated that the Tribunal held that it had no jurisdiction to deal with claims related to disputes that arose before May 11, 1997 and it gave the reasons for its conclusion.  The Committee pointed out that the Tribunal must answer all the parties’ questions, but is not required to comment on all arguments when they are of no relevance to the award.

The Committee held that since the Tribunal “found itself without competence to deal with the [Claimants’] claims regarding the accounts receivable, the Tribunal also implicitly rejected as a necessary consequence all factual or legal implications of these claims and examined only other subsequent acts to May 11, 1997.”[6] 

Thus, according to the Committee, the Tribunal had to be considered as having answered the Claimant’s arguments, whether based on Treaty or contract, and it did not ignore any particular point affecting as a result the outcome of the award.  Consequently, the Committee established that he Tribunal did not fail to state reasons in its award.

Decision

Based on the analysis mentioned above, the Committee rendered a Decision on October 19, 2009, rejecting Claimants’ application for annulment.

The Ad hoc Committee’s Decision in the present case shows the high standard of review for a petition for annulment to survive, and it reminds us that annulment proceedings under Article 52 of the ICSID Convention cannot be used as an appeal mechanism considering that Ad hoc Committees have very limited and specific powers.   

The Ad hoc Committee was constituted by Dominique Hascher (French) as President, Hans Danelius (Swedish), and Peter Tomka (Slovak).