The Cooling-Off Period as Condition Precedent in Investment Arbitration

On 15 December 2010, the ICSID tribunal in Murphy Exploration and Production Company International v Republic of Ecuador (ICSID Case No. ARB/08/4 - award on jurisdiction) decided that it does not have jurisdiction to hear the dispute as the Claimant had not complied with a six-month consultation and negotiation period as stipulated in the relevant US-Ecuador BIT (Bilateral Investment Treaty). Murphy had contended that Republic of Ecuador had breached multiple provisions of the US-Ecuador BIT in relation to a service contract for exploration and exploitation of hydrocarbons in the Amazon and had referred the dispute to ICSID.

Article VI of this BIT provides that in the event of an investor-state dispute, the parties should first seek a resolution through consultation and negotiation, without setting a specific time limit for such negotiations. The arbitration clause in the BIT further provides that arbitration may be initiated only after a period of at least 6 months has lapsed since the date when the dispute arose. On the basis of these provisions, the Respondent argued that the BIT required the Claimant to attempt a resolution through consultation and negotiation for a period of six months before submitting a request for arbitration to ICSID. According to the Respondent, this provision is not optional, but an express condition precedent to arbitral jurisdiction. The Claimant argued that negotiations had already been conducted by the consortium operator Repsol on behalf of Murphy. The Claimant further argued that on the one hand, negotiations with Ecuador would have been futile because of the government's intransigence, and on the other hand, failure to comply with a waiting period is not a bar to the jurisdiction of the tribunal.

The tribunal held that the six-month period established in Article VI(3) of the BIT is a mandatory requirement and the tribunal also rejected Murphy’s arguments that negotiations with Ecuador would have been futile because of the government's intransigence, as well as that the requirement was procedural and could be waived. Accordingly, the tribunal found that the requirement stipulating that the parties should seek to resolve their dispute through consultation and negotiation for a six-month period constitutes a fundamental requirement that the Claimant must comply with before submitting a request for arbitration under the ICSID rules. A decision to the contrary would be against the fundamental rules of interpretation in light of Article 31 of the Vienna Convention on the Law of Treaties.

Moreover, the tribunal found that the obligation to negotiate is an obligation of means, not of results. There is no obligation to reach, but rather to try to reach, an agreement. To be able to determine whether negotiations would succeed or not, the parties must first initiate them. The purpose of such requirement is that during this “cooling-off period”, the parties should attempt to resolve their disputes amicably, without resorting to arbitration or litigation, which generally makes future business relationships difficult. It is not an inconsequential procedural requirement but rather a key component of the legal framework established in the BIT and in many similar treaties. The tribunal did not ignore the fact that if both parties would cling obstinately to their positions, the possibilities for having a successful negotiation would become null. However, there have been many cases in which parties with seemingly irreconcilable points of view manage to reach amicable solutions. However, as noted, to find out if this is possible, the parties must first try it.

When enforcing rights under a BIT, the investor, assuming that one or more of the substantive protections of the applicable BIT have been breached, must first check that the treaty grants direct rights to commence arbitration proceedings or to invoke some other means of recourse against the host state. BITs typically include a negotiation or consultation period (“cooling-off period”), before a claim may be brought. The period is usually between three and six months from the date when the dispute arose or was formally notified by the investor to the host state, at the end of which arbitration proceedings may be commenced. The practical purpose of the “cooling off period” is to facilitate settlement out of the public eye before positions become entrenched. This objective assumes added importance for a sovereign state dealing with disaffected foreign investors.

Notably, one of the co-arbitrators of the tribunal issued a dissenting opinion in which he objected to, among other issues, the tribunal’s findings regarding the futility of the negotiations. In the dissenting arbitrator’s opinion, the non-conciliatory position of the Ecuadorian government made it unreasonable to expect the investor to take any further attempts at settling the dispute. He also pointed out that the BIT clause setting out the negotiation requirement relates to both parties of the dispute and that the obligation to take conciliatory efforts cannot be attributed to the investor alone. Finally, the dissenting arbitrator also referred to the fact that the BIT does not clearly provide for the obligation to conduct negotiations for a period of six months but rather, that an automated mechanism is triggered when the dispute arises and that – following the wording and systematic layout of the dispute resolution clause – recourse to arbitration would become automatically available after a period of six months following this event.

Both the jurisdictional award and the dissenting opinion are available on the ICSID’s website.