US$1.76 billion dollar award levied against Ecuador in dispute with Occidental; tribunal split over damages
Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of Ecuador, ICSID Case No. ARB/06/11
The Republic of Ecuador has been ordered to pay US$1,769,625,000 billion in damages—the largest award to be handed down in an ICSID case—after a tribunal determined that Ecuador’s decision to terminate an American oil company’s participation contract was tantamount to expropriation.
While the tribunal agreed with Ecuador that the claimants—Occidental Petroleum Corporation and Occidental Exploration and Production Company (OEPC)—breached the participation contract, it nonetheless ruled that Ecuador’s response to that violation was disproportionate.
Under Occidental’s participation contract with Ecuador, the company was granted rights to explore and exploit oil in Block 15, located in the Amazon region, and keep a share of the oil that it produced.
The seeds of the dispute were planted in a ‘farmout’ agreement with Alberta Oil Corporation (AEC), which gave the Canadian firm a 40% economic interest in Occidental’s operations. Occidental and AEC also envisioned a second stage to the agreement, in which AEC would be granted legal title to the operations in Block 15.
Some four years later, on the heels of a US$75 million award in favour of Occidental in connection with another dispute with Ecuador, the farmout agreement came under scrutiny by authorities in Ecuador. The deal with AEC would ultimately lay the basis for the Minister of Energy to terminate Occidental’s contract in May 2006.
Was approval required?
A key point of contention was whether Occidental required the government of Ecuador’s approval to enter into the farmout agreement with AEC. Under the terms of Occidental’s participation contract with Ecuador, government approval was required to transfer rights under the participation contract to third parties.
Occidental argued that the farmout agreement only provided AEC with an economic interest in the project; it would not be until the second stage of the agreement, when AEC would be granted legal title, that rights would be transferred.
In siding with Ecuador, however, the tribunal determined that AEC was granted more than an economic interest, it also gained managerial and voting rights under is agreement with Occidental. As such it, the tribunal concluded that Occidental had made a “serious mistake” in not gaining government approval.
Yet the tribunal would add that Occidental had not acted in bad faith. While noting that the company was clumsy in its communication with the Ministry of Energy and Mines—and appeared to be internally divided on whether to seek approval from Ecuador—it did not attempt to conceal the deal. Indeed, the agreement was announced in a press release, and discussed with government officials, although the farmout agreement itself with AEC was not shared with government.
Was the response proportional?
The tribunal went on to consider whether the government’s decision to terminate its contract with Occidental was a proportionate response to the oil company’s violation. After considering the principle of proportionality in Ecuadorian and international law, it decided that it was not.
Influencing that decision was the conclusion that the farmout agreement had not caused economic harm to Ecuador. The tribunal noted that AEC was already an approved operator in Ecuador, and that “it is overwhelmingly likely that approval would have been given in authorization had been sought in October 2000.”
The tribunal also implied that Ecuador’s response was motivated in part by the fact that it had recently lost an arbitration with Occidental in an investment-treaty claim over value added tax. That award provoked a significant political and public backlash against Occidental.
“It is sufficient to note that (the VAT award) seems to have led to a good deal of ill-feeling against OEPC, as did the discovery that OEPC had transferred rights under the Participation Contract in violation of the laws of Ecuador,” wrote the tribunal.
The tribunal also emphasised that other, less severe options were open to the government, including demanding a transfer fee from Occidental, and revising the production contract in order to improve the terms for Ecuador. It noted that the Ministry of Energy and Mines had not resorted to terminating contracts for similar infractions by other companies.
Having determined that Ecuador’s response was not proportionate in the context of Ecuadorian and international law, the tribunal had “no hesitation” in finding that it amounted to a breach of fair and equitable treatment and was tantamount to expropriation under the Ecuador-US BIT.
Arbitrators disagree over damages
Following a lengthy consideration of damages, the majority of the tribunal, L. Yves Fortier (president) and David A.R. Williams (claimants’ nominee) determined that damages amounted to US$ 2.35 billion. The majority then reduced that amount by 25% due to Occidental’s violation of the production contract.
Ecuador’s nominee to the tribunal, Brigitte Stern agreed with the majority that Ecuador had acted disproportionately is terminating the contract with Occidental. However, in a sharply worded dissent, she disagreed with the majority’s decision on damages.
In Professor Stern’s opinion, Occidental was only eligible for 60% of the damages, having transferred 40% participation contract to AEC.
In contrast to the majority, Professor Stern decided that the farmout agreement could not be considered “inexistent” or void as a result of Ecuador’s termination of the participation contract. Rather, the agreement should be considered valid and binding until declared otherwise by a court.
Professor Stern stated that a selective reading of Ecuadorian cases, and a potential reliance on flawed translations, led the majority to incorrectly rule the farmout agreement invalid—and in doing so has “manifestly exceeded its jurisdiction.”
The majority’s damages decision on damages is “in violation with fundamental principles of international law,” wrote Professor Stern, and went on to describe two unacceptable results that flow from the decision. Either Occidental pays AEC 40% of the damages, “which means the majority has in fact granted damages to the benefit to AEC/Andes—which would be a manifest excess of power …” Or Occidental will hold onto the full award, “but then the decision of the majority will have condoned the violation of the international principle against unjust enrichment.”
Notably, Professor Stern’s dissent displays terms that would provide ammunition for an annulment request—“one the few grounds on which an award which a “tribunal has manifestly exceeded its powers.” Ecuador has signaled that it will seek annulment of the award.
The award is available here: http://www.italaw.com/sites/default/files/case-documents/italaw1094.pdf
Professor Brigitte Stern’s dissent is available here: http://www.italaw.com/sites/default/files/case-documents/italaw1096.pdf
The dispute between Quiborax and Bolivia proceeds to the merits phase
Quiborax S.A., Non Metallic Minerals S.A. and Allan Fosk Kaplún v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Decision on Jurisdiction
On September 27th, 2012, seven years after the notice of arbitration was filed, an arbitral tribunal upheld jurisdiction in a case opposing Chilean investors to the Plurinational State of Bolivia.
Quiborax, a Chilean mining company, together with Mr. Allan Fosk, its Chief Financial Officer, and Non Metallic Minerals (NMM), a Bolivian mining company of which Quiborax maintained to be the majority shareholder, claimed that Bolivia unlawfully revoked NMM’s 11 mining concessions. The claimants alleged, among other reasons, that Bolivia breached the Bolivia-Chile BIT by not according them fair and equitable treatment and by committing expropriation.
Bolivia presented several objections to the tribunal’s jurisdiction. First, it argued that the claimants were not investors within the meaning of the BIT and accused them of fabricating evidence in this respect for the sole purpose of gaining access to ICSID arbitration. Second, it asserted that the claimants did not make an investment within the meaning of the BIT and of the ICSID Convention. Finally, it stated that the claimants could not invoke the protection of the BIT, since their investment was made in breach of Bolivian laws.
The first phase of the proceedings was unusually eventful.
Both parties requested multiple time extensions to finalize a settlement agreement they eventually never concluded. In 2009 the arbitration resumed and Bolivia initiated criminal proceedings against Mr. Fosk and others to ascertain whether they fabricated evidence to prove their status of investors. Consequently, the claimants filed a request for provisional measures before the arbitral tribunal and obtained a decision ordering Bolivia to suspend the criminal proceedings. As a result, Bolivia filed an unusual challenge to all members of the tribunal, which was later rejected by the ICSID Secretary General.
At the jurisdictional stage the claimants argued that, by its conduct in the arbitration, Bolivia forfeited its right to object to the tribunal’s jurisdiction. They invoked the inherent powers of the tribunal to preserve the integrity of the proceedings, and requested the arbitrators to declare Bolivia’s objections inadmissible. The tribunal, however, sided with Bolivia and stated that it could not abdicate the task of determining its own jurisdiction, by virtue of the kompetenz-kompetenz principle (i.e. the principle according to which a tribunal has jurisdiction to rule on its own jurisdiction).
Another contended issue was whether the evidence obtained during the criminal proceedings against Mr. Fosk and others was admissible. Rejecting claimants’ objection, the tribunal considered that it had broad discretion to rule on the admissibility of any evidence brought before it. It went on to conclude that the evidence from the criminal proceedings was admissible, and that its probative value will have to be addressed if and when necessary.
Bolivia questions Quiborax’ acquisition of NMM
According to the claimants, Quiborax and Mr. Fosk became majority shareholders of NMM in 2001. Bolivia, instead, claimed that the tribunal lacked jurisdiction ratione personae, since the claimants never became shareholders of the company. On the contrary, Bolivia alleged that the claimants submitted fabricated evidence in this regard.
Bolivia claimed that the sequence of transactions that allegedly resulted in the acquisition of NMM was absurd, that the claimants failed to submit key documents to prove the acquisition and that those submitted presented multiple irregularities.
The tribunal reviewed the entire record of the case and found that, despite some “documentary discrepancies”, the claimants’ account of the facts was “consistent and well-documented” and, thus, that it had jurisdiction ratione personae over the dispute.
An objective definition of investment.
Bolivia argued that the tribunal lacked jurisdiction over the dispute because the claimants did not make an investment within the meaning of the BIT and of the ICSID Convention. The host State claimed that legal certainty called for an objective definition of investment and proposed a test based on six elements, which included conformity with the laws of the State, contribution to its economic development and good faith.
The tribunal affirmed that the ICSID Convention contained an objective definition of investment, which must be met irrespectively of the definition of investment contained in the BIT. It stated that the definition encompassed three elements: contribution of money and assets, duration and risk. The tribunal considered that contribution to the host State’s development “may well be the consequence of a successful investment,” but it is not an element of its definition. The tribunal also deemed that neither conformity with the laws of the State, nor respect of good faith determined the existence of an investment.
With this reasoning in mind, the tribunal partially upheld Bolivia’s objection and decided that Mr. Fosk, detaining one single share of NMM, made no contribution of money and assets and thus, did not make any investment. However, the arbitrators considered that Quiborax, having paid for the 51% of shares of NMM, indeed invested in Bolivia.
Legality requirement had both subject-matter and temporal limitations
Bolivia objected to the tribunal’s jurisdiction asserting that the claimants’ transfer of NMM’s shares was made in breach of Bolivian law and thus in violation of the legality requirement set forth in the BIT. Bolivia proposed an extensive interpretation of this requirement, submitting that it covered any breach of Bolivian law, regardless of its seriousness and of the time in which it occurred.
The claimants, instead, supported a narrower approach. They maintained that the legality requirement applied only to violations of the host State’s fundamental principles or investment regime and that it was temporarily limited to the time of the establishment of the investment. Moreover, they claimed that Bolivia was now barred from raising such objection, since it failed to do so in almost three years of negotiations.
The tribunal was not convinced by any of the approaches proposed. It considered that the requirement has both subject-matter and temporal limitations. From the temporal perspective it is limited to the establishment of the investment. From the subject-matter perspective, instead, it covers only “non-trivial violations” of the host State’s laws, violations of its foreign investment regime and fraud.
Finally, the tribunal found that the fact that the parties engaged in long settlement discussions could not bar Bolivia from contesting the legality of the investment in the arbitration. According to the tribunal, a different conclusion would have a “chilling effect on the host State’s willingness to entertain settlement negotiations.”
The tribunal was composed by Prof. Gabrielle Kaufmann-Kohler (president), Marc Lalonde (claimant’s nominee) and Prof. Brigitte Stern (Bolivia’s nominee).
The decision is available in English here: http://www.italaw.com/sites/default/files/case-documents/italaw1098.pdf
And in Spanish here: http://www.italaw.com/sites/default/files/case-documents/italaw1099.pdf
Case by US construction firm against the Ukraine is dismissed
Bosh International, Inc and B&P Ltd Foreign Investments Enterprise v. Ukraine, ICSID Case No. ARB/08/11
In decision dated October 25th, 2012, an ICSID tribunal has rejected all claims against the Ukraine by an American construction firm and its Ukraine-based affiliate.
The claimants, Bosh International, Inc, and B&P Ltd Foreign Investments Enterprise, entered into a joint venture to develop and operate a hotel complex with Tara Schevchenko University in Kiev in 2003.
Several years later a university audit of the agreement uncovered a number of “irregularities.” For example, while the building was intended to cater to educational activities, the audit determined that the facility had been used largely for business seminars. A second audit by an office of the Ministry of Finance—the General Control and Revision Office (CRO)—raised similar concerns.
The ministry’s audit recommended a number of actions, including that the university consider terminating its agreement with B&P.
Shortly after, the university commenced court proceedings. A local court initially rejected the university’s case, but it was re-submitted and a commercial court issued a judgement that terminated the joint venture agreement with B&P.
Tribunal considers attribution
The claimants argued that actions taken by Ukrainian courts, the Ministry of Justice, CRO and the University of Kiev were attributable to the state of Ukraine. While finding little difficultly in seeing the acts of government ministries and the courts as attributable to the state, the tribunal paused to consider whether the same applied to the university.
Taking guidance from the International Law Commission’s articles on state responsibility, the tribunal decided that the university could not be considered a state organ. But the tribunal considered the issue of whether the university exercised elements of governmental authority to be more complex.
Although a separate legal entity, and largely autonomous, the tribunal also found that the university exercised certain aspects of governmental authority, such as its provision of education services and management of state-owned property.
However, the tribunal concluded that the university’s agreement with B&P did not relate to these governmental functions, but was better understood as a “private or commercial activity which was aimed to secure commercial benefits for both parties.”
FET and expropriation claims dismissed
The claimants charged that the Ukraine breached its commitments on fair and equitable treatment, and expropriation under the United States-Ukraine BIT. A claim under the BIT’s umbrella clause was also asserted.
In support of the FET and expropriation claims, the claimants argued CRO had directed the university to terminate its agreement with B&P, and exceeded its mandate in doing so. The claimants also argued that CRO’s audit was arbitrary and lacked due process.
Turning to the evidence, the tribunal found these claimants to be unsubstantiated: CRO’s audit appeared to conform to Ukraine law, and that B&P was granted appropriate due process.
Nor did the tribunal accept the claimants’ charge that CRO directed the university to terminate the contract. Rather, CRO’s recommendation was to “consider” termination, and, therefore, CRO could not be held responsible for an expropriation.
The claimants’ claim that the university had acted in bad faith was also dismissed. Here the tribunal referred back to its earlier decision that the university’s actions could not be attributed to the state.
The claimants’ referred to the BIT’s umbrella clause (which reads: “Each Party shall observe any obligation it may have entered into with regard to investments”) and argued that the Ukraine was responsible for contractual breaches by university.
In response, the tribunal considered whether “Each Party” referred only to state parties, or also extended to entities controlled by the state. The tribunal noted that the BIT distinguishes between the terms “Party” and “State enterprise” as legal entities.
In the tribunal’s opinion, the ‘Party’ referred to in the umbrella clause refers to a party acting in the capacity of the state. Given its earlier decision that the university’s agreement with B&P could not be attributed to the state, the tribunal concluded Ukraine had not entered into an ‘obligation’ with respect to the claimants.
The tribunal found itself “fortified” by the fact that, in its review of 20 cases involving claims under an umbrella clause, none entailed a “contract entered into by the investor with an entity akin to the University.”
Notably, for “the sake of completeness,” the tribunal considered how it would have ruled if the university’s conduct could be attributed to the state. Aligning itself with the decisions in cases such as Société Générale de Surveillance v. Republic of the Philippines, the tribunal determined that an umbrella clause should not “override” the dispute resolution provisions in a contract. Rather, before invoking the umbrella clause, “the claimant in question must comply with any dispute settlement provision included in that contract.”
In the case of the claimants’ contract with the university, disputes were to be settled in accordance with Ukrainian legislation. As the contract dispute between B&P and the university had already been considered by Ukrainian courts, and the contract terminated by an order of the court, the tribunal determined that the claimants could not now assert a claim for breach of the contract under the umbrella clause.
No misconduct by Ukrainian courts
The claimants’ final claim asserted that Ukrainian courts failed to respect the principle of res judicata, and by doing so committed a breach of fair and equitable treatment under the BIT.
The claimants pointed to the fact that the university’s first effort to terminate its contract with B&P before a commercial court failed when the court declined jurisdiction. Rather than appealing the decision, the claim was re-submitted to another commercial court judge, and that judge agreed to terminate the contract.
However, the tribunal found that the court’s acted consistently with Ukrainian law. Nor, viewed through the lens of international law, could the courts be considered to have offended a sense of judicial propriety.
The tribunal emphasised that the claimants had an opportunity to try their case before Ukrainian courts, but declined to do so. “In this regard,” wrote the tribunal, “it seems to the Tribunal that the Claimants are bound by their litigation strategy and its consequences.”
The tribunal ordered to claimants to contribute US$150,000 towards the Ukraine’s legal costs (one-sixth of its costs) due to delays in the proceedings requested by the claimants. The parties’ must split the ICSID fees.
The tribunal was Dr. Gavan Griffith (president), Professor Philippe Sands (claimant’s appointee), and Professor Donald McRae (respondent’s appointee)
The award is available here: http://www.italaw.com/sites/default/files/case-documents/italaw1118.pdf
ConocoPhillips subsidiary awarded US$ 66.8 million against Venezuela’s state-owned oil company
Phillips Petroleum Company Venezuela Limited (Bermuda) and ConocoPhillips Petrozuata B.V. vs. Petroleos de Venezuela, S.A., ICC
Patricia Cristina Ngochua
An International Chamber of Commerce tribunal awarded a subsidiary of ConocoPhillips US$66.8 million against the Venezuelan state-owned company Petroleos de Venezuela, S.A. (PDVSA). In the same decision, dated September 17th, 2012, the tribunal rejected a US$102.9 million claim by another subsidiary of ConocoPhillips against PDVSA.
The proceeding consolidated two separate arbitration requests arising out of agreements entered into between the claimants and PDVSA’s subsidiaries related to investments in the Petrozuata and Hamaca projects.
The Petrozuata project
ConocoPhillips argued that the failure of a PDVSA subsidiary, Maraven, to absorb oil production cuts imposed by the Venezuelan government as an OPEC-member state out of its own production violated a guaranty agreement with PDVSA.
In deciding for ConocoPhillips, the tribunal rejected PDVSA’s argument that the production curtailments ordered by the Venezuelan government constituted a “hecho del principe” (i.e. an external non-imputable cause) under the Venezuelan Civil Code. That principle excuses non-performance of a contractual obligation where non-compliance cannot be avoided, is based on the principle of good faith, and could not be foreseen.
In arriving at this conclusion, the tribunal noted that PDVSA failed to meet the high burden of proof required to justify Maraven’s non-performance of its obligations.
In its defense, PDVSA also argued that the 2007 ‘Migration Law’ had the effect of extinguishing all contractual agreements related to the Petrozuata project. However, ConocoPhillips countered that this would amount to giving the Migration Law a “retroactive” effect which is prohibited under the Venezuelan Constitution.
In finding for ConocoPhillips, the tribunal agreed that considering ConocoPhillips’ claims as extinguished would amount to giving retroactive effect to the Migration Law. The tribunal rejected PDVSA’s assertions that the Migration Law was in the public interest, and therefore qualified as an exception to the principle that a law may not have retroactive effect.
The Hamaca Project
Here ConocoPhillips argued that the failure of another PDVSA subsidiary, Corpoguanipa, to call a board meeting that may have led to the adoption of measures to mitigate the impacts of OPEC-driven production cuts was a breach of its contractual obligations.
However, the tribunal concluded that ConocoPhillips failed to establish a sufficient causal link between its claim for damages resulting from Corpoguanipa’s decision not to convene a board meeting and its alleged breach of contractual obligations.
The tribunal also noted that PDVSA’s obligations under the Hamaca guaranty agreement limited its liability to “obligations specific to Corpoguanipa.” Since the contract provisions underlying ConocoPhillips’ claim did not relate to obligations that were specific to Corpoguanipa, but were intended more generally to provide a system of proportionate reallocation in case of production cuts, the tribunal found that PDVSA was not liable to ConocoPhillips.
This ICC arbitration is separate from an ongoing proceeding brought by ConocoPhillips before an ICSID tribunal in 2007 after Venezuela enacted a series of laws that effectively nationalized ConocoPhillips’ investments in the Petrozuata and Hamaca projects, and the offshore Corocoro development project.
Costs and Expenses
Arbitration costs were fixed at US$820,000, to be borne equally by each side. Claimants and the respondent were ordered to shoulder their own legal expenses.
The tribunal was Pierre Tercier (president), Horacio Alberto Grigeria Naon (claimants’ nominee), and Ahmed Sadek El-Kosheri (respondent’s nominee).
The award is available here: http://www.iareporter.com/downloads/20120924/download