By Elizabeth Whitsitt
December 6, 2009
An ad hoc committee, established pursuant to the Arbitration Rules, has rejected the annulment application of two US power companies: M.C.I. Power Group, L.C. (MCI) and New Turbine, Inc. (New Turbine). The companies’ bid for annulment came after an ICSID tribunal dismissed part of the companies’ case against Ecuador on jurisdictional grounds, and dismissed the remainder on the merits in the summer of 2007.
Problems for MCI and New Turbine began some thirteen years ago when MCI and New Turbine (through their subsidiary Seacoast, Inc.) entered into an agreement with Ecuadorian state-owned energy provider Instituto Ecuatoriano de Electrificacion (INECEL) and Old Dominion Electric Cooperative (ODEC) for the sale of electricity. This agreement was signed on November 17, 1995, almost two years before the US-Ecuador entered into force on May 11, 1997.
In April of 1996 various differences arose between the parties to the agreement, which resulted in Seacoast Inc. suspending its electricity operations and complaining that INECEL had not paid for prior power sales. A month later, INECEL unilaterally terminated the agreement. Challenging INECEL’s termination of the agreement and requesting payment of approximately US $25 million in damages for breach of contract, MCI’s and New Turbine’s subsidiary commenced suit in the Ecuadorian courts. The domestic proceedings ended in 2000, however, when the Superior Court of Justice of Quito held that it lacked jurisdiction to hear the case.
On December 16, 2002, MCI and New Turbine commenced arbitral proceedings against Ecuador relying on the 1997 U.S.-Ecuador BIT, claiming that Ecuador had breached its obligations under that treaty. The ICSID tribunal hearing the case rejected arguments by MCI and New Turbine that Ecuador had violated the fair and equitable treatment and expropriation provisions of the US-Ecuador BIT. Additionally, the tribunal ruled that portions of the claim related to acts or omissions occurring before the US-Ecuador treaty entered into force, thus limiting the tribunal’s jurisdiction over certain of the claims alleged by the US claimants.
Some four months later MCI and New Turbine sought partial annulment of the tribunal’s award. Grounding their application on Articles 52(1)(b) and 52(1)(d) of the , the US investors asserted that the tribunal had manifestly exceeded its powers and failed to state the reasons upon which its decision was based. Specifically the US investors took issue with the tribunal’s application of the non-retroactivity principle to the US-Ecuador BIT.
In considering those arguments, the ad hoc committee, composed of Judge Dominique Hascher, Judge Hans Danelius and Judge Peter Tomka, was clear that “…the role of an ad hoc committee is a limited one, restricted to assessing the legitimacy of the award and not its correctness.” Consequently, the ad hoc committee noted that “[t]heir mission [was] confined to controlling the legality of awards according to the standards set out expressly and restrictively in Article 52 of the [ICSID] Convention.”
The ad hoc committee then went on to reject all of MCI’s and New Turbine’s arguments for annulment. In so doing, the ad hoc committee reiterated that the standard of review applicable in annulment proceedings is very high. Examples of the ad hoc committee’s reasoning in this regard can be seen throughout its decision.
Pursuant to Article 52(1)(b) MCI and New Turbine alleged that “…the [t]ribunal’s interpretation of the principle of non-retroactivity of treaties was egregiously wrong and so grave as to be tantamount to an abrogation of the BIT.” In particular, they complained that the tribunal was wrong to characterize INECEL’s non-payment for power services as an act or omission that only occurred prior to the BIT entering into force. In their view, those non-payments were acts or omissions that continued up to (and beyond) the date on which the US-Ecuador BIT entered into force. Thus, MCI and New Turbine argued that the tribunal could exercise jurisdiction over claims related to those non-payments.
In rejecting those arguments, the ad hoc committee noted that “[f]ailure to apply the proper law is not an independent ground for annulment under Article 52 . . . Ad hoc committee decisions however recognize that a tribunal’s failure to apply the applicable law may constitute a manifest excess of powers pursuant to Article 52(1)(b).” Thus, while the ad hoc committee agreed that reasonable minds could disagree regarding the interpretation of the non-retroactivity of the BIT, the tribunal’s decision did not amount to “manifest excess of powers” because, in the ad hoc committee’s opinion, “[a]n egregious violation of the law would assume that there is a departure from a legal principle or legal norm which is clear and cannot give rise to divergent interpretations.”
MCI and New Turbine also challenged the tribunal’s analysis under Article 52(1)(e) of the ICSID Convention. Specifically, the US investors complained that the tribunal “failed to state reasons for the Award by forgetting to address the question whether Ecuador breached the BIT by continuously refusing to pay…outstanding accounts receivable owed to them whether on a continuous basis or only after the entry into force of the Treaty.” This, MCI and New Turbine argued, was “an issue of sufficient importance affecting the outcome of the Award.”
Citing previous arbitral awards, the ad hoc committee noted that annulment under Article 52(1)(e) is concerned with a failure to state any reasons with respect to all or part of an award, not the failure to state correct or convincing reasons. Given such a rigid standard of review, the ad hoc committee went on to reject the US investors’ bid for annulment. In so doing, this ad committee’s decision falls in line with prior decisions by reconfirming that annulment applications under Article 52 of the ICSID Convention are not appeals and a very high standard of review will be applied.*
* See Previous Reporting on standard of review in annulment proceedings:
“Ad Hoc Committee confirms Argentina is on the hook to Azurix for US $165 million” By Elizabeth Whitsitt, Investment Treaty Newsletter, 2 October 2009 available here:
“Argentina must respect award despite ICSID finding that it has errors of law,” By Luke Eric Peterson, Investment Treaty News, 15 October 2007, available here:
Decision on Annulment M.C.I. Power Group L.C. and New Turbine Inc. v. Republic of Ecuador, ICSID Case No. ARB/03/6 is available here: