Investment Treaty - failure to observe treaty's cooling off period results in tribunal declining jurisdiction

In a decision in December 2010, an ICSID tribunal in Murphy v Ecuador ruled that it did not have jurisdiction due to the claimants' failure to comply with the six month "cooling-off" period specified in the US-Ecuador BIT. This decision highlights the importance of considering compliance with such cooling off periods carefully before commencing an arbitration.

Background

Two subsidiaries of Murphy International ("Murphy"), the claimant, were part of a consortium involved in a service contract with the Republic of Ecuador for the exploration and exploitation of hydrocarbons in the Ecuadorian Amazon.

In 2006, Ecuador passed a law requiring contractor companies (such as the consortium) to grant the Ecuadorian state a participation of at least 50% (later increased to 99%) of extraordinary income arising from price differences in oil selling. This law brought a number of oil companies operating in Ecuador, including the consortium, into conflict with the Government.

The consortium, led by Spanish company Repsol, entered into negotiations with the Government, and on 12 November 2007 Reposl notified Ecuador of a dispute under the Spain-Ecuador BIT.

On 29 February 2008, Murphy notified Ecuador of a dispute under the US-Ecuador BIT, referring to the earlier negotiations led by Repsol, and on the following Monday, 3 March 2009, Murphy filed its claim with ICSID. In 2009 an agreement was reached between the consortium and Ecuador, and the original service contract was modified. Murphy's claim however continued.

Ecuador objected to jurisdiction on two grounds:

Ecuador's first challenge: alleged withdrawal of consent under Article 25(4) of ICSID

Ecuador argued that it had withdrawn its consent to arbitrate a type of disputes, such as the present one brought my Murphy, pursuant to a notice made under Article 25(4) of the ICSID Convention. However, on this point the tribunal rejected Ecuador's challenge, ruling that the consent given in a BIT must be withdrawn under the provisions of that BIT, and not by way of Article 25(4) of the ICSID convention, and that therefore Ecuador's consent under the BIT remained valid.

Ecuador's second challenge: non-compliance with "cooling-off" period

Ecuador argued that Murphy had not complied with the six month negotiation and consultation period specified in Article VI of the US-Ecuador BIT, and that the tribunal therefore had no jurisdiction.

Murphy argued that it had complied with the negotiation and consultation requirement under the BIT through its indirect involvement in the negotiations led by the consortium operator, Repsol. The tribunal however concluded that Murphy could not rely on those negotiations because (i) they were led by Repsol on behalf of the legal persons composing the consortium (Murphy's subsidiaries) and not on behalf of those companies' shareholders (such as Murphy), and (ii) they were carried out under the Spain-Ecuador BIT, whilst Murphy's claim was brought under the US-Ecuador BIT. Because Murphy was claiming a breach of the US-Ecuador BIT, the dispute should have been notified to Ecuador as a breach of the US-Ecuador BIT and negotiated on that basis. There was, found the tribunal, no notification of the dispute until Murphy's notice on 29 February 2009, 3 days before the claim was commenced.

Murphy sought to argue that the requirement for consultation and negotiation was procedural in nature, and should not therefore act as a bar to the tribunal's jurisdiction. The tribunal rejected this argument, and ruled that it was not possible to ignore the existence of norms contained in the BIT regarding the obligation of the parties to attempt negotiations in order to resolve their disputes. The tribunal stated that "cooling-off" periods are not "mere formalities", but amount to something more serious: an essential mechanism enshrined in many BITs which compels parties to make a genuine effort to engage in good faith negotiations before resorting to arbitration.

Murphy also argued that negotiations with Ecuador would have been futile. The tribunal however concluded that the obligation is not one of results, but of means, and thus, the parties were required to at least initiate negotiations.

Having rejected Murphy's arguments on this point, the tribunal (by majority) concluded that because Murphy had not complied with the six month "cooling-off" period required in the US-Ecuador BIT, it did not have jurisdiction over Murphy's claim. The dissenting arbitrator, whilst not disputing that "cooling off" periods such as that in the US/Ecuador BIT must be complied with, concluded that through its involvement in the negotiations led by Repsol the "cooling off" period had been complied with.

Conclusion

Although there is no system of precedent in investment arbitration, and previous tribunals have adopted a less strict approach to "cooling off" periods, this case highlights the importance of considering such periods carefully before commencing an arbitration. Claimants should exercise caution before seeking to rely on negotiations which did not follow formal notification of a claim, or which were conducted by other group companies or affiliates, rather than the claimant itself.

Muphy Exploration and Production Company International v Republic of Ecuador (ICSID Case No ARB/08/4)