By Fernando Cabrera Diaz
April 8, 2010
An international tribunal has found Ecuador in breach of the Ecuador-United States BIT for the failure of its courts to reach a timely resolution in seven breach-of-contract lawsuits filed by Texaco Petroleum in the early 90s. The tribunal awarded Chevron Corporation, who bought Texaco in 2001, almost US$700 million in compensation subject to adjustments for taxes and pre-award interest.
As reported previously by ITN, Chevron initiated the arbitration against Ecuador in May of 2006, alleging that the Ecuadorian judicial system’s failure to resolve the Texaco lawsuits in a reasonable time amounted to a denial of justice under customary international law. Additionally, Chevron argues that Ecuador has violated several obligations under the Ecuador-U.S. BIT including its obligations to provide U.S. investors with fair and equitable treatment, and an effective means for them to assert claims and enforce their rights.
From the outset Ecuador raised several defenses, most notable of which was that Chevron should be barred from pursuing their claim due to abuse of process.
According to Ecuador, Chevron’s attack on its judiciary contradicted previous statements made by Texaco to a U.S. District Court in the Aguinda v. Texaco case. Ecuador also accused Chevron of inappropriately using the arbitration as a means to discredit its courts ahead of future arbitration Chevron was planning (and has since filed) in relation to the Lago Agrio environmental damages lawsuit being litigated in Ecuador.
The Aguinda case was a 1993 lawsuit launched by Ecuadorian citizens against Texaco in U.S. District Court over environmental damage in the Lago Agrio region of Ecuador.* Texaco convinced that court that Ecuadorean courts were fair and competent and were the proper venue to hear that dispute. After Texaco prevailed a similar lawsuit was then initiated in Ecuador and is now in its final stages (Lago Agrio litigation).
In its March 30 decision the tribunal ultimately sided with Chevron finding that Ecuador violated Article II(7) of the BIT by not providing the company an effective means of asserting claims and enforcing its rights.
In reaching this conclusion the tribunal found that Article II(7) provided a “distinct and potentially less-demanding test” than the “high threshold” that must be met to establish denial of justice under customary international law.
According to the tribunal the delays by Ecuadorean courts in deciding the seven Texaco contract claims, which by the time arbitration began in 2006 had all been pending for at least 13 years, exceeded the allowable threshold under Article II(7).
The tribunal did find that that Texaco’s statements in the Aguinda case qualified as evidence against the company for the purposes of determining if the delays in the cases were unreasonable. But given that Aguinda was decided in August 2002, the tribunal simply concluded that the delays could not be deemed unreasonable before that date.
The tribunal went on to find that the “award of damages in respect of the breach of Article II(7) encompasses any compensation owed with regard to the remaining BIT and custom-based claims,” and that it therefore did not need to decide those other claims.
To estimate what damages were owed to Chevron the tribunal found it needed to decide the seven cases “as it determines an honest, independent, and impartial Ecuadorian judge, applying Ecuadorian law, would have done.” After doing so it concluded Chevron was entitled to a total of US$ 354,558,145.00.
To this the tribunal added $344,063,759.84 for interest accrued under Ecuadorean law between the filing of each of Texaco’s claims and the initiation of the arbitration, resulting in a total sum of US$ 698,621,904.84 as of December 21, 2006.
This total is to be adjusted downward to account for taxes Texaco would have paid on the awards under Ecuadorian law, something the tribunal will do in a separate order due to the complexity involved. Once that adjustment is made, pre-award interest owed under the BIT for the time period between December 21, 2006 and the date of the award will be added.
The dispute was decided by a tribunal composed of Charles Brower, Prof. Albert Jan van den Berg, and Prof. Karl-Heinz Böckstiegel (chairman), under the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules.
As reported previously by ITN*, on September 23, 2009 Chevron filed a second arbitration against Ecuador. In that claim the company alleges that Ecuador has unfairly favored the plaintiffs in the Lago Agrio litigation abusing the criminal justice system in violation of the U.S.-Ecuador BIT. Chevron alleges several BIT violations including Article II(7).
Among other things, the company asks that Ecuador be found liable for any award in the Lago Agrio litigation should Chevron loose that case. An expert in the Lago Agrio litigation recently recommended that Chevron be ordered to pay US$ 27 billion in damages.
*Read previous ITN reporting available at:
“Ecuadorians battle Chevron in US court over BIT arbitration in long-running environmental damage dispute,” By Fernando Cabrera Diaz, Investment Treaty News, 11 March 2010, available here:
March 30, 2010 award in first Chevron v. Ecuador arbitration, available at: http://ita.law.uvic.ca/documents/ChevronTexacoEcuadorPartialAward.PDF
September 23, 2009 Chevron notice of arbitration in second dispute with Ecuador, available at: http://www.chevron.com/documents/pdf/EcuadorBITEn.pdf