Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5
The 2008 arbitration between U.S. oil and gas company Burlington Resources Inc. (Burlington) and Ecuador under the United States–Ecuador bilateral investment treaty (BIT) has now reached the quantum stage. A tribunal at the International Centre for Settlement of Investment Disputes (ICSID) has issued its Decision on Reconsideration and Award on February 7, 2017.
Burlington Oriente, a wholly-owned subsidiary of Burlington, entered into Production Sharing Contracts (PSCs) with Ecuador pertaining to oil blocks 7 and 21 in the Amazon. Under the PSCs, Burlington assumed the entire risk of exploitation in exchange for a share of the oil produced. As international oil prices soared, Ecuador unsuccessfully attempted to renegotiate the PSCs.
Ecuador subsequently imposed a windfall levy of 99 per cent on oil revenues. When Burlington refused to pay the tax, Ecuador initiated proceedings to seize Burlington’s share of oil production under the PSCs. Burlington suspended operations because the investment had become unprofitable, and Ecuador took possession of blocks 7 and 21. Finally, Ecuador terminated the PSCs.
Burlington initiated ICSID arbitration in 2008, and the tribunal issued its Decision on Jurisdiction in June 2010. The December 2012 Decision on Liability found that, by taking over the oilfields, Ecuador unlawfully expropriated Burlington’s investments.
In the course of the arbitration, Ecuador raised counterclaims for damage to the environment and the oilfields’ infrastructure, and the parties entered into an agreement conferring the tribunal with jurisdiction over the counterclaims. In its Decision on Counterclaims, also dated February 7, 2017, the tribunal found liability and ordered Burlington to pay Ecuador compensation of roughly USD41 million.
The award concerns the quantum of compensation owed by Ecuador and arbitration costs.
Although not res judicata, decisions preliminary to award should only be re-opened in exceptional circumstances
As a preliminary matter, the tribunal considered Ecuador’s motion to reconsider the decision on liability. It observed that neither the ICSID Convention nor the Rules contain provisions dealing with the power of tribunals to reconsider their decisions.
In that context, earlier tribunals had held that decisions preliminary to an award “that resolve points in dispute between the Parties” are vested with res judicata and therefore cannot be reopened. However, more recently, the SCB v. Tanesco tribunal held that pre-award decisions are not res judicata, and that “there may be circumstances where a tribunal should consider reopening a decision that it has made” (para. 85).
In line with SCB v. Tanesco, the tribunal held that a pre-award decision does not carry res judicata effects. It sought to clarify, however, that a lack of res judicata does not mean that such decisions can necessarily be reopened. Considering that an issue resolved once in the course of an arbitration should in principle not be revisited in the same proceedings, the tribunal concluded that the decision on liability should be reconsidered only in exceptional and very limited circumstances.
As for the nature of the exceptional circumstances, the tribunal turned to a test based on an analogy to ICSID Convention Article 51. It therefore required that (i) a fact is discovered; (ii) of such a nature as decisively to affect the pre-award decision; (iii) which was unknown to the tribunal and to the applicant when the pre-award decision was rendered; (iv) the applicant’s ignorance not being due to negligence; and (v) the request for reconsideration being made within 90 days after the discovery of the fact.
On the facts, the tribunal found that the above test was not satisfied and denied Ecuador’s motion.
Appropriate standard of compensation is full reparation as set out in ILC Articles
BIT Article III(1) only describes the conditions under which an expropriation is considered lawful. The provision does not set out the standard of compensation for expropriations resulting from breaches of the BIT. The tribunal held that the appropriate standard of compensation is the customary international law standard of full reparation set out in Article 31 of the Draft Articles on the Responsibility of States for Internationally Wrongful Acts of the International Law Commission (ILC Articles), applied by analogy.
In this respect, the tribunal observed that Part Two of the ILC Articles setting out the legal consequences of internationally wrongful acts, to which Article 31 belongs, is not applicable to the international responsibility of states vis-à-vis non-states. However, the tribunal found it to be generally accepted that the ILC Articles can be transposed to the context of investor–state disputes.
Compensation for Burlington’s expropriated investment quantified on DCF method
Applying the ILC standard of compensation, Burlington was entitled to full reparation for those losses that resulted from Ecuador’s unlawful expropriation. However, the tribunal considered that only one of the three heads of damages proposed by Burlington constituted a compensable loss.
In brief, it found that potential contract claims accruing to Burlington subsidiaries, which had withdrawn from the treaty arbitration, were not compensable. Furthermore, the lost opportunity to extend the Block 7 PSC was too speculative to be compensable. Therefore, only Burlington’s own investment up until the point of expropriation, but not the entire value of the project, was compensable.
With respect to the valuation of Burlington’s investment, the parties agreed on the use of the Discounted Cash Flow (DCF) method, although disagreeing on several variables and assumptions to be used. Ultimately, the tribunal ordered Ecuador to pay USD379,802,267 as compensation for the expropriation of Burlington’s investment.
One arbitrator disagrees on calculation under DCF method
Based on customary international law, the majority of the tribunal found that compensation due to Burlington should be calculated based on a date—August 31, 2016—that was a proxy for issuance of the award. Arbitrator Stern, however, disagreed with the resulting analysis as it made use of ex post information and added profits between the date of the expropriation and the deemed date of the award.
Despite this disagreement, Stern does not appear to have issued a dissent. Instead, the award contains reference to her dissent on the same issues in a previous case—Quiborax v. Bolivia.
Ecuador ordered to pay preponderance of arbitration costs
Pursuant to Article 61(2) of the ICSID Convention, the tribunal exercised broad discretion to allocate the costs of the arbitration. This triggered an analysis of all the circumstances of the case, including the extent to which a party contributed to the costs and whether that contribution was reasonable and justified.
The tribunal found that it was appropriate for Ecuador to bear 65 per cent of the costs of the arbitration with Burlington bearing 35 per cent. Each party was ordered to bear its own legal costs and expenses.
Notes: The tribunal was composed of Gabrielle Kaufmann-Kohler (President appointed by the parties, Swiss national), Stephen Drymer (claimant’s appointee, Canadian national), and Brigitte Stern (respondent’s appointee, French national). The Decision on Reconsideration and Award is available at http://www.italaw.com/cases/documents/5141.
Matthew Levine is a Canadian lawyer and a contributor to IISD’s Investment for Sustainable Development Program.