Jonathan C. Hamilton, “Solving Complex Problems: Crisis Management, Complex Negotiations and the New Quito International Airport” (2011)

How did one of the most complex disputes in recent Latin American history become a Deal of the Year and award-winning airport? The new Quito International Airport in Ecuador was named the Best Airport in South America. Just a few years ago, the mega-project faced disputes, treaty denunciation and arbitration. The outcome reveals some critical elements and best practices for crisis management and complex negotiations. The resolution of the related case before the International Centre for Settlement of Investment Disputes (ICSID) at the World Bank involved the successful conclusion of numerous rounds of negotiations in the face of simultaneous expropriation and treaty denunciation. After this investor-government blow up, the anatomy of a complex negotiation included expropriation, denunciation, arbitration, suspension, negotiations and resolution - the anatomy of a deal.

How do you turn one of the most complex investment and commercial disputes in Latin America into a negotiated resolution? The Quito International Airport Project dispute reveals some critical elements and best practices for crisis management and complex negotiations. The dispute was named the Dispute of the Year 2011 by LatinLawyer magazine, which described it as "one of the most complex project disputes in Latin America's recent history." The resolution of the related case before the International Centre for Settlement of Investment Disputes (ICSID) at the World Bank followed the successful conclusion of numerous rounds of negotiations in the face of simultaneous expropriation and treaty denunciation.

According to LatinLawyer, "As far as project finance-related disputes go, they are usually already complex enough on their own; but what if the dispute in question is about a concession owned by a government that has just pulled out of the only means to dispute resolution in the contract? This is what lawyers had to deal with in the negotiations over the future of Quito airport between the Ecuadorean government and the project's lenders and operators."

This article draws on publicly available information to discuss the practices that the investor group followed in this master negotiation, facilitating the resolution of this complex scenario against long odds. The result was the renegotiation of one of the most intractable project disputes through tireless and respectful efforts involving a consortium of investors, a group of major international lenders and Ecuadorian officials at diverse levels, while simultaneously affirming investment protections and access to international arbitration despite the unprecedented complexity of the project crisis.

The Project

The Quito International Airport Project involves the provision of world class airport services at the existing Mariscal Sucre International Airport and the financing, construction and operation of the New Quito International Airport after substantial completion in October 2012 and subsequent airport opening date. It is a major project for the capital of Ecuador that contributes significantly to economic development and tourism.

The new airport will open after years of increasing demand for an airport with greater capacity and expansion capability. While Mariscal Sucre International Airport is located in the heart of Quito at more than 9,000 feet above sea level, the New Quito International airport's more distant location and lower altitude will mean bigger planes and heavier payloads, ultimately bringing more passengers and cargo traffic into the region.

The Parties

Corporación Quiport, S.A. is the concessionaire for the Project, backed by an international investor consortium that included Aecon Group Inc. (Canada), Andrade Gutierrez S.A. (Brazil), Airport Development Corporation (Canada) and HAS Development Corporation, an affiliate of the Houston Airport System (U.S.) and entities from Spain and other jurisdictions.

The lender group for the Project involved the Inter-American Development Bank, Export Development Canada and, connected to the United States government, the U.S. Export-Import Bank and the Overseas Private Investment Corporation. Each institution has its own mission and system for approving and monitoring loans and managing disputes.

The concession was granted by the Municipality of the Metropolitan District of Quito, which established a management unit. The Project also involves various other state entities of the Republic of Ecuador such as various ministries and regulatory agencies.

The Crisis

The financing for the approximately US$660 million project is sourced with equity, debt and airport tariffs. The airport fees, which include certain fees and charges for airport services paid by departing passengers, were designed to be a critical prong of the financing structure. A cornerstone of the project structure was an investment protection agreement signed in 2003 by the Republic of Ecuador, the concessionaire Quiport, and the investors, providing general and specific legal stability as well as providing for dispute resolution at ICSID, as well as a corresponding agreement protecting lenders. The parties thus structured a concession dependent upon the stability of the Ecuadorean legal framework.

Subsequent to the project close, Ecuador promulgated a new constitution in 2008 as well as forming a new constitutional court. In July 2009, the new Constitutional Court of Ecuador ruled that the private airport fees, a critical prong of the project financing, were State property.

As LatinLawyer reported, "Construction of the new airport was two-thirds complete when it ground to a halt in 2009. The Constitutional Court of Ecuador ruled that the private airport tariffs, central to the project's financing structure, were property of the state. At around the same time, Ecuador announced it was withdrawing from ICSID. The court's ruling triggered defaults, suspension of the project's financing and construction of the new airport stopped. The investors commenced arbitration before ICSID in line with the project's investment protection agreement. Intense rounds of negotiations ensued."

As a representative of one of the investors has commented, "the legal framework was fundamentally changed and affected a concession that assumed that revenue and fees were private. It called into question whether we actually had any revenue to continue the project and finance the loans."

Early Negotiations and Dispute

After the crisis crystallized in July 2009, the investors gave notice of a dispute under the investment protection agreement for violation of various legal stability provisions. Early rounds of negotiations followed, involving representatives of the investors, lenders and State. When the dispute remained unresolved as of December 2009, the investors commenced arbitration proceedings before ICSID which were registered at the end of the year, and prior to the alleged effectiveness of the six month notice period for Ecuador's denunciation of the ICSID convention, which would take effect on January 7, 2010. They also notified disputes under various bilateral investment treaties. The concessionaire, investors and lenders also delivered a draft agreement reflecting the early negotiations. The year ended without resolution.

The Resolution

The new year in 2010 began with stalemate but also with the suspension of the ICSID proceeding by agreement. A new approach to negotiations emerged. Ultimately, after more than 25 rounds of bilingual negotiations, principally in Quito and Washington, DC, the parties successfully reached agreement on legal, commercial and financial terms for the Project, leading to a signing ceremony in Quito on August 9, 2010, to mark the execution of a strategic alliance agreement, as well as an amended concession agreement, implementation agreement and affirmation of an underlying investment protection agreement. Approximately a year after the crisis arose, the ceremony featured the participation of the President, the Mayor of Quito and other major Ecuadorian public officials. The deal included numerous approvals and conditions precedent before the restructuring could be finalized. Those conditions were satisfied and concluded through a series of closing events and execution of ancillary agreements that led to an effective date of February 4, 2011, based on which the ICSID arbitration was discontinued, a step formally recognized by the Centre at the World Bank on November 11, 2011.

Elements of the Renegotiation

The renegotiation featured various best practice Negotiation Process - The renegotiation process entailed more than 25 rounds of negotiations involving counsel and/or principal parties in Quito, Ecuador, and Washington, DC, and other locations and involved diverse parties including the multinational investors, myriad Ecuadorian government officials and the lender group. The investor group centralized its management of the negotiation process in a core team that facilitated local dealings by the head of the concessionaire, lender dealings by key representatives of the investors and legal dealings through lead counsel, all in close coordination with all investors and local and international counsel. The negotiations required a recognition of the need for a win-win-win approach for investors, lenders and the State, reflecting diverse financial, legal, policy and political concerns. This in turn required careful management of public statements.

Legal and Contractual Framework - The parties agreed on an innovative strategic alliance to carry out the renegotiation, together with myriad ancillary concession, construction, financing, implementation and trust- related agreements, in the context of the new constitutional regime, as well as the maintenance of the foundational elements for the project finance structure required by lenders and investors. This required intense and patient negotiation sessions and a recognition that, in short, there is more than one way to say the same thing.

Investment Protections - The investors issued dispute notices under contracts and treaties and commenced arbitration before ICSID pursuant to the investment stability agreement with Ecuador, then suspended the proceeding during ongoing renegotiations. The Ecuadorian government subsequently affirmed investment protections and access to ICSID and international arbitration as part of the renegotiation package. The investors also had rights under bilateral investment treaties and used the notification period thereunder to advance negotiations.

Economic Development Impact - The crisis caused a project shutdown and the success of the renegotiation required raw determination by an investor group that experienced ongoing losses. Due to the successful renegotiation, construction of the new airport resumed, bringing at least 2,500 jobs for contractors, subcontractors and skilled workers. The Project has a positive impact on Ecuador's local and national economy and holds important ramifications for foreign investment in Ecuador and bilateral relations between Ecuador and each of Canada, Brazil and the United States.

Conclusion

The parties reached closure on the final documentation implementing the terms of the agreement in a three- city closing that took place in Washington, DC, and in Quito and Guayaquil, Ecuador, and correspondingly led to discontinuance of the case before the ICSID and the resumption of funding and construction of the new international airport. The new Quito international airport was inaugurated and commenced commercial operations  in February 2013. One year later, it was named the Best Airport in South America by the World Travel Awards.

After an investor-government blow up, the anatomy of a complex negotiation may include expropriatory steps, denunciation, arbitration, suspension, negotiations and resolution: the anatomy of a deal.

Jonathan C. Hamilton