Ecuador v. United States Inter-State Arbitration under a BIT: How to Interpret the Word “Interpretation”?

There is an inter-State arbitration pending between Ecuador and the United States under the Bilateral Investment Treaty (BIT) between those two countries (Treaty between United States of America and the Republic of Ecuador Concerning the Encouragement and Reciprocal Protection of Investment, 27 August 1993). The Ecuador v. US case , which was initiated in June 2011, is, as far as I am aware, a very very rare instance of inter-State arbitral proceedings under a BIT. As is well known, one of the main purposes of BITs is to give investors the right to bring claims against the host state of investment. This feature of BITs, and the vast number of such treaties, has meant that investor-State arbitrations under BITs have replaced diplomatic protection as the primary means of settling investment disputes. There have been hundreds of investor-State proceedings before arbitral tribunals.  However, BITs also contain compromissory clauses by which disputes concerning the interpretation or application of disputes under these treaties can be brought before arbitral tribunals established under the BIT. The only other inter-State BIT cases that I am aware of are the recent Italy and Cuba cases which were discussed in the April 2012 issue of the American Journal of International Law. In general, States leave it to the investor to protect its rights under the BIT.

The present proceedings brought by Ecuador are particularly interesting for a couple of reasons: one specific to investment law, the other relating to general international law. First of all, as the case arises out of Ecuador’s dissatisfaction with the interpretation given by an earlier investor-State arbitral tribunal (Chevron and Texaco Petroleum Company v. Republic of Ecuador, Partial Award, 30 March 2010) to a particular provision of the Ecuador – US BIT,  the case may be construed as a way by which Ecuador is trying to use the inter-State procedure as a way of appealing the results of a case brought under the investor-State procedure. There have been concerns by many that there is no appellate procedure in the investment treaty system and this case seems to be an attempt to create one.

Secondly, Ecuador’s case raises a general question about how one interprets the standard compromissory clause to be found in treaties where jurisdiction is granted to an  international tribunal over disputes between the parties “concerning the interpretation or application of the treaty”. Ecuador is of the view that the US has a different interpretation from it of a provision of the BIT. However, Ecuador does not argue that the US has violated the BIT, it only seeks to resolve a question about how the BIT should be interpreted. So, does the tribunal have jurisdiction over a case where the parties disagree about how a treaty should  be interpreted but where there is no allegation that the respondent party has actually misapplied the treaty or done any act which constitutes a violation of the treaty. The question is whether this standard formulation of a compromisory clause means that international tribunals can only deal with concrete disputes about violations of treaties or whether they can play a general advisory function with respect to the meaning of the treaty. In short, what is a dispute about “interpretation”of a treaty?After the Chevron and Texaco Petroleum Company v. Republic of Ecuador, Partial Award, Ecuador wrote to the US to state that it disagreed with the interpretation given the tribunal in that case and asked the US to state whether it agreed with Ecuador’s interpretation. In short, Ecuador was trying to come to agreement with the other party regarding the interpretation of the treaty. Under the Vienna Convention on the Law of Treaty, that subsequent agreement would have been as good as binding with regard to the interpretation of the treaty.  The US refused to respond to Ecuador’s request. Ecuador then brought this case arguing that there was a dispute regarding interpretation of the treaty. It seems rather strange to say that a failure of the US to respond to a request to clarify its interpretation means that there is a dispute regarding interpreation. The US may well agree with Ecuador’s interpretation but surely it cannot be under an obligation to say so. In English contract law, it is well established that one party cannot unilaterally require that silence in response to an offer equals acceptance (the rule in Felthouse v. Bindley). Likewise, Ecuador cannot unilaterally impose the view that silence equates to disagreement.

In any event, even assuming the US disagreed with Ecuador’s interpretation, the US has not violated the provision in question. And Ecuador is not claiming that it has violated the provision. In other words, there is no dispute about the application of the treaty. The question of interpretation is one that arises, in a sense, in the abstract, i.e it is unconnected with a dispute about how the treaty has been applied.  Does this abstract dispute fall, under the compromissory clause, within the jurisdiction of the tribunal provided for in that clause?

In the Applicability of the Obligation to Arbitrate under Section 21 of the United Nations Headquarters Agreement Advisory Opinion of 1988, the ICJ dealt with a similarly interesting question regarding how to construe these types of compromissory clauses. There, the issue was whether the US was under an obligation to enter into arbitration with the United Nations regarding the legality of attempts by the US Congress to force the closure of the Palestinian Liberation Organizations mission to the UN in New York. The US Executive agreed that such a closure would violate its obligations under the US/UN Headquarters Agreement but it opposed arbitration. Its argument then was that there was no dispute regarding the interpretation or application of the treaty because both the US and the UN agreed that the proposed act would be a violation of the treaty (and the US had not actually committed the act of closing the office). The ICJ disagreed. It was of the view that agreement over interpretation of the treaty did not mean there was no dispute regarding “interpretation or application.” In  that case there was no dispute about the interpretation of the treaty but there was one about its application.

In the present case, does a lack of dispute about the application of the treaty mean there is no dispute about interpretation?