Spring 2012

Jurisdiction Upheld by Arbitral Tribunal in Chevron’s Dispute with Ecuador

In a third interim award issued on 27 February 2012, an arbitral tribunal, consisting of Dr. Horacio Grigera Naón, Prof. Vaughan Lowe and V.V. Veeder Q.C, upheld its jurisdiction of the dispute in Chevron Corporation and Texaco Petroleum Company v. Ecuador (“Chevron”) to proceed to the merits phase. The dispute is being heard under the auspices of the Permanent Court of Arbitration (“PCA”) in The Hague under the 1976 UNCITRAL arbitration rules.

Factual Background

Texaco Petroleum’s Operations in Ecuador (1964-1998)
In 1964, Ecuador granted rights of exploration and exploitation of oil in its Oriente region to a consortium of companies, including Texaco Petroleum. Oil was discovered there in 1967; a concession agreement was concluded in 1973 (“1973 Concession Agreement”) and was due to expire in 1992.

Under the 1973 Concession Agreement, Texaco Petroleum owned 37.5% of the consortium. Additionally, the 1973 Concession Agreement entitled the Ecuadorian State Oil Corporation, Corporación Estatal Petrolera Ecuatoriana, (now Petroecuador) to acquire an interest in the consortium; Petroecuador had acquired a 62.5% interest in the consortium by the end of 1976. Thus, out of the consortium’s US$23 billion total revenues, Texaco Petroleum received approximately US$500 million. Ecuador received approximately 90% of all revenues (i.e., around US$20.7 billion) in the form of revenues, royalties, taxes and subsidies.

The exploitation of the oil wells resulted in severe pollution in the surrounding area, affecting public health, the environment and the local economy. The 1973 Concession Agreement designated Texaco Petroleum as operator of the relevant wells and this was the case until 1990. Ecuador regulated, supervised and in some cases approved the consortium’s operations. In 1990, Texaco Petroleum and Ecuador carried out an environmental audit of the area. This audit, amongst others, identified areas for environmental remediation, at a cost of up to US$13 million. At the end of the concession, in 1992, Texaco Petroleum transferred its interest in the consortium to Petroecuador. However, as the parties had not agreed on how to proceed with remediation work, Ecuador had not released Texaco Petroleum from its liability as operator of the wells.
In 1994, Texaco Petroleum, Petroecuador and Ecuador concluded a Memorandum of Understanding (“1994 MOU”). Under the 1994 MOU, each of the parties was to carry out remediation work in specific areas and be released from liability afterwards. At the same time, the parties bore no liability for remediation work – or lack thereof – carried out in areas under the responsibility of another party.

After concluding the 1994 MOU, Ecuador added a further condition to release Texaco Petroleum from liability; that it must reach settlements with Ecuadorian municipalities for environmental pollution. A Settlement Agreement was entered into in 1995 for this purpose. Texaco Petroleum carried out its part of the remediation work between 1995 and 1998. Additionally, Texaco Petroleum settled the claims that Ecuador required during the course of 1996. On 30 September 1998, Ecuador finally released Texaco Petroleum from liability for the operation of the wells.

The Lago Agrio Litigation (2003 onwards)
The Lago Agrio litigation was the second stage of the so-called Aguinda class-action litigation taken before United States Federal Courts between 1993 and 2002. The Aguinda plaintiffs were residents of the polluted areas; Texaco was the sole defendant. In 2002, the Federal Court of Appeals ruled that Ecuadorian courts were the appropriate venue to entertain that lawsuit. Subsequently, on 30 May 2003, a number of the Aguinda plaintiffs commenced the Lago Agrio litigation by suing Texaco and Chevron in Ecuador. Texaco, Texaco Petroleum’s parent company, “merged” with Chevron on 9 October 2001 (this “merger” and the legal consequences thereunder, is a contentious issue between the parties in the Chevron arbitration).

On 14 February 2011, the Provincial Court of Justice of Sucumbíos in Ecuador condemned Chevron to pay approximately US$8.65 billion for environmental damages. The Provincial Court also added a further civil penalty of US$8.65 billion unless Chevron issued a public apology within 15 days of the issuance of that judgment. Chevron did not issue that apology.

The Present Case and Ecuador’s Jurisdictional Objections
In their notice of arbitration of 23 September 2009, the Chevron Corporation (“Chevron”) and Texaco Petroleum Company (“Texaco”) claimed that Ecuador, through its actions and omissions, had committed several breaches of the bilateral investment treaty in place between the United States and Ecuador (the “BIT”) which entered into force on 11 May 1997. Ecuador, however, raised a number of jurisdictional objections to the tribunal’s ability to decide, on the merits, the claims put forward; namely:
That Chevron and Texaco did not possess a prima facie case on the merits;
That the dispute did not arise out of, or relate to, an “investment” in Ecuador under the BIT;
That the dispute did not arise out of an investment agreement under the BIT;
That the tribunal lacked jurisdiction as it would be required to determine the rights of third (non) parties to the arbitration; and
That the tribunal lacked jurisdiction under the “fork in the road” provision of the BIT.

The Tribunal’s Decision

The Prima Facie Standard
In line with international judicial practice, the Chevron tribunal provisionally assumed that the assertions made by Chevron and Texaco were true. In the tribunal’s view:
“the jurisdictional stage of this arbitration cannot take the form of a preliminary hearing on the merits: but, conversely, the Claimants must establish that their case is sufficiently serious to proceed to a full hearing on the merits.”

Interestingly, however, the tribunal held that a disputed fact “uniquely relevant” to the existence of jurisdiction would need to be proven by a claimant.

The Life of the “Investment”
Perhaps the most interesting aspect of the tribunal’s interim award is its holding that an “investment can undergo several phases not chronologically coterminous” with the instrument that gave rise to it. In the tribunal’s opinion:

“the BIT imposes no temporal limit on an investment… There is no reason in the wording of this BIT to limit the lifespan of a covered investment short of its complete and final demise, including the completion of all means for asserting claims and enforcing rights by the investor or others in regard to that investment.”

In this regard, the tribunal held that Texaco’s investment: “began in 1964, it includes the 1995 Settlement Agreement; and, with the Lago Agrio litigation, that investment has not yet reached its complete and final demise.” Indeed, in the tribunal’s view, a long-term oil concession: “must inevitably involve extensive clean-up costs.” Thus, the entitlement of Texaco to receive BIT protection for environmental remediation work carried out in 1995 to 1998 did not necessarily lapse, despite the fact that the 1973 Concession Agreement had expired in 1992.

Third Parties
Under international law, although a tribunal may have jurisdiction over a dispute, it should not seek to exercise that jurisdiction if the subject-matter of that dispute would determine the rights and obligations of a State not party to the proceedings. This is the so-called Monetary Gold principle laid down by the International Court of Justice in the case of that name. In the tribunal’s view, however, the Lago Agrio plaintiffs were not indispensable third parties to the arbitral proceedings:
“The question for this Tribunal is in essence whether the Respondent [Ecuador] has or has not violated rights of the Claimants under the BIT… the Lago Agrio plaintiffs, who are not parties to the settlement agreements or the BIT, do not have rights that are directly engaged by this question.”

Fork in the Road
Article VI(3) of the BIT contained a fork in the road provision, thereby potentially precluding rival forms of dispute settlement. The question for the tribunal to decide was whether the dispute before it was the same dispute already submitted elsewhere in, for example, the national courts of Ecuador. In the tribunal’s view, there was a “short answer” to this jurisdictional objection by Ecuador. Under the wording of Article VI(3), the fork was inapplicable if the “national or company concerned [had] not submitted the dispute for resolution.” In rejecting this jurisdictional objection, the tribunal held:

“Whatever might be the position in respect of differently-worded fork in the road provisions in other BITs, it is clear that the Claimants [Chevron and Texaco] in this case have not themselves submitted the dispute before this Tribunal to any other court or tribunal.”

Conclusion

The Chevron tribunal’s decision to uphold jurisdiction means that this litigation saga continues to rumble on. By far the most important aspect of this decision would appear to be the notion that investments need not be “chronologically coterminous” with the legal instruments (e.g., contracts) under which the bulk of the investment is made. This decision therefore suggests that BIT protection can survive these instruments and arguably implies that BIT protection may be triggered before all of the provisions of these instruments have come into effect.

There is, of course, no formal system of precedent in international investment arbitration. However, if other tribunals elect to follow this lead, the Chevron decision may prove to have important practical consequences for investment protection in the future.