Syria and Pakistan acceded to ICSID in 2006. Vietnam may be following soon

On January 25, 2006, Syria deposited with the World Bank its instrument of ratification of the Convention on the Settlement of Investment Disputes Convention ("ICSID Convention"). It became the 143th ICSID Contracting State.

On November 8, 2006, Pakistan has passed into law the ICSID Convention, which had long been signed and ratified (1965 and 1966, respectively). You can click here for the report.

As to Vietnam, the country has not yet signed the ICSID Convention, but it looks like this is going to take place still in 2006 (you can click here for the story).

Why the above news is headline to a weblawg dedicated to Brazilian arbitration law? Very simple: to date, Brazil has not signed the ICSID Convention.

FDI in Brazil, and Brazilian FDI Abroad

In my earlier posting I talked about arbitration and foreign direct investment ("FDI") in Brazil, but it is important to point out --again--, that foreign investors doing business in Brazil do not benefit from the arbitration framework set by the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States ("ICSID Convention"). Foreign investors in Brazil do not benefit from protection of bilateral investment treaties ("BITs") either, as to date Brazil has not ratified any of the 14 BITs it entered with different countries --worldwide-- during the 1990s.

It is obvious that the existence of a framework for investment-state disputes in Brazil ("Investment Arbitrations"), would not only bring more certainty for foreign investors investing in Brazil, but also make Brazil an even more attractive destination for FDI.

Brazil’s lack of (i) signature of the ICSID Convention and (ii) ratification of BITs, however, not only has an effect on FDI flows to Brazil --as the lack of Investment Arbitrations subject foreign investors to the slowness of Brazilian courts, in case they have a dispute with the Brazilian government-- but also affects the investment of Brazilian multinational corporations ("Brazilian MNCs") abroad, as the investment of Brazilian MNCs will not be protected by investment treaties affording neutral dispute resolution for foreign investors. This is significant, because in 2006 alone, Brazilian MNCs have invested abroad more than the country has received as FDI, to the extent that Brazilian MNCs currently have a total amount of investment abroad of over $106 billion U.S. dollars (from January 2006 to November 2006, Brazilian MNCs have made FDI overseas of approximately $25 billion U.S. dollars [See Múltis brasileiras crescem mais no exterior (O Globo, January 21, 2007, at 31), available at http://www.oglobo.com.br/].

Brazilian MNCs should make FDI overseas using --as vehicles for such investments-- subsidiaries incorporated in countries signatories of the ICSID Convention. This is the case of Petrobrás, Brazil’s state-controlled oil company with an "imbroglio" with the Bolivian government over expropriation of Petrobrás assets in that country. Fortunately for Petrobrás, if negotiations with the Bolivians fail, and Petrobrás is obligated to litigate against Bolivia, Petrobrás can initiate Investment Arbitration proceedings against Bolivia, under the ICSID Convention, instead of bringing suit in Bolivian Courts. This, because (a) Petrobrás’ FDI in Bolivia was made through a Dutch subsidiary company of the Petrobrás’ group, and (b) Bolivia and the Netherlands are both signatories to the ICSID Convention.

ICSID Award against Argentina

According to the media, an arbitral tribunal under the auspices of the ICSID has recently awarded $165 million dollars in damages to Azurix Corporation, a Delaware company.

Azurix, the former water concessionaire of Buenos Aires, has sought to recover damages in excess of $565 million dollars from the Republic of Argentina.

ICSID’s caseload has registered over 30 proceedings against Argentina, following the 2001 economic crisis in that country.

Petrobras Arbitration II

The Bolivian government has been trying to force Petrobras —Brazil’s state-owned oil company— to renegotiate the prices in their gas purchase agreement. Not only has Bolivia been disregarding Petrobras contractual rights in said gas purchase agreement, it ignored Petrobras and other foreign investors privately held investments (when it “nationalized” foreign investment in Bolivia’s oil and gas fields last May 1, 2006).

This situation highlights the importance of investing in a country where investment treaty arbitration is available for the foreign investor.

Fortunately (for Petrobras), although Brazil has not acceded to the 1965 Washington Convention —which has established the ICSID - International Center for the Settlement of Investment Disputes— Bolivia and the Netherlands are signatories of the Convention. And, importantly, the foreign investment in Bolivia was made through a Dutch subsidiary company of Petrobras.

Petrobras will have fair and adequate means to obtain compensation for any losses that it may have incurred in Bolivia. This, if Petrobras decides to initiate ICSID proceedings against the Bolivian government (there are political aspects that may interfere, as Petrobras is state-controlled). If this was the case, though, it would certainly be the first investment treaty arbitration brought by a Brazilian company against a foreign state.

Click here for Bolivian's decree law that "nationalized" the Bolivian oil and gas fields

Update on Odebrecht vs. Ecuador

International news agencies mention that Brazilian multinational Odebrecht has accepted the terms of Ecuador to resolve a dispute over the San Francisco hydroelectric plant (you can click here for related news in English).

According to globo.com, Odebrecht deposited approx. US$ 44 million today under the trust of a neutral third party. The amount deposited will be pending satisfaction of a third party independent analysis of the contingencies related to the breakdown of the San Francisco hydroelectric plant.

It's likely that the dispute does not qualify for investor-State arbitration, as Brazil has not entered in any BIT with Ecuador or signed the ICSID Convention. At the moment, there is no news available, as to whether there was an arbitration clause in the agreement signed by Odebrecht for the construction of the power plant.

In any case, it is not acceptable that Brazilian corporations continue to be unprotected by bilateral or multilateral investment treaties in their investments abroad.

Brazilian Investment in Ecuador in trouble

In my posting dated May 04, 2007, I’ve mentioned that there was a strong reason for a review in Brazil’s long-standing aversion to investment-arbitration: the protection Brazilian nationals' investment abroad.

Well, there are clear examples of that taken from today’s international news.

Earlier today, President Rafael Correa of Ecuador ordered the Ecuador’s armed forces to seize assets of Brazilian multinational Odebrecht. The assets are estimated to be worth about $800 million US Dollars (link here).

Today’s news also mentions the troubles of Petrobras (Brazil’s state-controlled oil company) in Ecuador, relating to the surrendering of Petrobras’ oil field concessions in that country (link here).

I don’t know if either Odebrecht or Petrobras made their FDI in Ecuador through subsidiary companies (in a country allowing them to use an investment-arbitration scheme) or using Brazilian vehicles. Also, I don't know any further details of either case, and I'm not making any judgments here. My personal opinion is simply that both companies would be much better off arbitrating their disputes at ICSID or any other neutral arbitral tribunal than litigating against Ecuador in Ecuadorian courts.

Investor-State Arbitrations

As I have mentioned before, Brazil has not signed the 1965 Washington Convention. Brazil has signed about 14 Bilateral Investment Treaties, and all such Treaties establish arbitration to take place under either the ICSID or the UNCITRAL Rules. To date, however, none of these BITs have been passed into law as they haven't been ratified by the Brazilian Senate.

Undoubtedly this lack of ratification brings legal uncertainty to foreign investors in Brazil, but it doesn’t look like any of such BITs —nor the 1965 Washington Convention— will be ratified any soon.

Int'l Arbitration Conventions ratified by Brazil

Brazil is a party to: (i) the 1958 Convention on the Recognition and Enforcement of Foreign Arbitration Awards (New York Convention); (ii) 1975 Inter-American Convention on International Commercial Arbitration (Panama Convention); (iii) the 1979 Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards (Montevideo Convention); and (iv) the 1998 International Commercial Arbitration Agreement of MERCOSUR (Mercosur Agreement).

To date, however (and as I have previously mentioned in this Blawg), Brazil has not signed the 1965 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (Washington Convention), and therefore, Brazil is not a member of the International Center for the Settlement of Investment Disputes –ICSID.