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American companies doing business in Latin America are increasingly running into legal problems. As a result, the governments of Latin America are facing a rapidly growing number of multimillion-dollar arbitration claims and lawsuits from disgruntled foreign corporations whose business deals went sour. Some examples: • Costa Rica is facing a $57 billion arbitration claim from the Houston-based Harken Energy Corp. because the country’s Ministry of Environment and Energy allegedly blocked Harken from exercising its contractual right to drill for oil off the nation’s Caribbean coast. • Bolivia is fighting an arbitration claim of $25 million, and far more could be at stake. An international consortium headed by the San Francisco-based Bechtel Corp. has argued that Bolivia wrongfully canceled the consortium’s concession to provide water to the third-largest city, Cochabamba, and expropriated the consortium’s water-system assets. The $25 million claim covers only the money that the consortium put into Cochabamba’s water system, according to a Bechtel spokesman. It does not include lost profits, which the consortium may also seek to recover in the arbitration. • Ecuador has been fighting in its courts to keep $180 million in taxes collected from EnCana, Occidental Petroleum, and other foreign oil companies working in the country. The companies have claimed they are entitled to the same tax rebate given to exporters in order to promote overseas sales, but Ecuador’s tax authorities said that all applicable tax rebates are already included in contracts with the oil companies. • In a case involving a Canadian company, cash-strapped Colombia recently paid an arbitral award of $73 million to Nortel Networks, based in Brampton, Ontario. Nortel successfully argued that it was entitled to this money under a contract whereby it installed 200,000 fixed telephone lines in exchange for guaranteed profits of $143 million by 1999. The guaranteed profits never materialized, and Colombia had to pay up. NOT UNIQUE TO LATIN AMERICA These disputes are all part of a growing trend, according to Pedro Martinez-Fraga, chairman of Greenberg Traurig’s international litigation practice. “You can see it starting in the late 1990s,” he says. “Data from the International Chamber of Commerce show the number of arbitration cases has grown dramatically” between Latin American governments and private companies. Partly the result of globalization, it is not unique to Latin America. International disputes between governments and businesses are growing rapidly in Eastern Europe and Asia, as well — areas “where there is political or civil unrest, or where the political or legal system is lagging behind economic changes,” says Joe Zumpano, managing partner of Miami’s Ferrell Schultz Carter Zumpano & Fertel, which has represented parties in a variety of international disputes. Nevertheless, the growth of international disputes is most dramatic in Latin America, according to several experts. This is not surprising, since the region has all the risk factors: political and civil unrest, as well as unreliable judicial systems. Moreover, because the region is going through an economic slump, when a dispute arises, Latin American countries don’t have the resources to reach satisfactory compromises with unhappy businesses, according to Patricia Menendez-Cambo, chair of Greenberg Traurig’s international corporate practice. The result is lawsuits and arbitrations. Running to U.S. courts is often fruitless. The Foreign Sovereign Immunities Act protects foreign nations and their governmental agencies from being sued on the basis of sovereign actions. Going to court in Latin America may not be a good option, either. Courts there work quite slowly, and their decisions can be colored by national interest. “The judiciary in Latin America hasn’t kept up with the process of democratization,” says Martinez-Fraga. “The process and procedures are old. And the independence of the judiciary is often suspect. It is getting better, but it is still suspect.” The best way to resolve international disputes is through arbitration, according to Columbia University Law School professor George Bermann. “Arbitration awards make the most sense because of the international conventions that support them in terms of recognition and enforcement,” he says. More than 120 countries, including the United States, have signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. It requires the signatory states to enforce arbitration awards, in contrast to judgments of national courts, which are not easily enforceable beyond a nation’s borders. “There is no other jurisdiction in the world that has a treaty obligation to enforce a U.S. court judgment,” says David Lindsey, a partner in the New York office of Clifford Chance. ARBITRATION UNDER BITS A new, more powerful type of arbitration began to emerge in the 1990s, as a result of globalization and the proliferation of bilateral investment treaties, called BITs. “There were very few BITs in Latin America before the 1990s,” says Lindsey. “Now there are over 380 in the region. These BITs always had arbitration provisions in them, but no one paid attention to them until the mid-nineties.” Under these treaties, countries give up the right to assert the priority of their national laws over the BIT obligations. They give up the procedural right to be sued only in their national courts, submitting to arbitration before the International Centre for Settlement of Investment Disputes (ICSID). This form of arbitration is particularly powerful because the center is an arm of the World Bank, says Lindsey: “Once you have an award under ICSID against a foreign sovereign, it becomes very handy when that [country] wants to get a loan from the World Bank. Basically, the country knows that if there is an ICSID award, it will eventually have to pay it.” But there is a catch. Arbitration under a BIT is not available for a mere commercial dispute. The government entity must have allegedly committed some treaty violation, such as expropriation, whereby foreign companies are treated differently than domestic businesses. The provisions of a BIT apply only to the two signatory countries and their respective nationals. So a company with a complaint may need to take creative legal steps to be covered by such a treaty. In the Bechtel-Bolivia dispute, for instance, there was no applicable treaty between Bolivia and the Cayman Islands, where Bechtel’s consortium was originally registered. The consortium shifted its registration to the Netherlands, allowing it to seek arbitration by ICSID under a treaty between the Netherlands and Bolivia. Bechtel spokesman Jeff Berger says the move was made at the insistence of a new Italian member of the consortium, Edison SpA, and that it may not have been made to take advantage of the treaty. “It is commonplace for Italian firms to have their corporate domicile in the Netherlands,” he says. Bolivia has contested the jurisdiction of ICSID, claiming that its contract with the Bechtel consortium specified that any disputes would be settled in Bolivia’s courts. The proliferation of arbitration claims under bilateral investment treaties seems likely to continue, Lindsey says. Since the start of 1996, 85 claims have been brought to ICSID, 36 of them against Latin American countries. Of 48 current cases, 22 are against Latin American states. This article was distributed by the American Lawyer Media News Service. Steve Seidenberg, a retired attorney, is a free-lance legal journalist in New Jersey.

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