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Chevron turns the tables, sues Ecuador for violation of bilateral investment treaty

By Michael Krauss

What is going on here? Why has Chevron sued Ecuador? This column has exhaustively detailed the tragedy of the suit against Chevron. This is the petroleum company’s counter-attack. Herewith a primer on the international arbitration proceeding pursuant to the U.S.-Ecuador Bilateral Investment Treaty (BIT), which entered into force in 1997.

What is a BIT?
A Bilateral Investment Treaty is an agreement between two countries that protects private investors from one country who make investments in the other. In general, the country where the investment is made (or “host State”, here, Ecuador) agrees that it will accord their investments “fair and equitable treatment.” Under a BIT, the host State commits to allow investors from the other State (here, Chevron) to sue it in an international forum in the event investors believe the host State has breached its obligations. This is referred to as a BIT arbitration. BIT arbitration vests jurisdiction in a neutral forum in which to resolve disputes between the host State and an investor of another State, and helps to level the dispute resolution playing field. If an investor submits a claim to arbitration, the parties constitute a tribunal with one member nominated by the claimant, a second nominated by the host State, and a presiding arbitrator selected by the other two arbitrators.

The International Court of Justice

What did Ecuador do to set off a BIT dispute?
Texaco Petroleum Company (“TexPet”) operated a Consortium along with the Ecuadorian state-owned company Petroecuador in the Lago Agrio region of that country. Prior to exiting the country, TexPet entered into agreements with the government of Ecuador, under which the government agreed to release TexPet from all liability for environmental claims in exchange for TexPet’s remediation of the affected area. TexPet funded the remediation, which the government of Ecuador supervised and confirmed in a 1998 release agreement. Ecuador there acknowledged that Petroecuador (which continued extraction operations in the area after TexPet’s departure) would be responsible for all remaining impacts. Nonetheless, in 2003 residents of the Lago Agrio area sued Chevron (which had acquired TexPet) for alleged environmental damage. Chevron’s BIT arbitration relates to the initiation and conduct of that lawsuit.

What did Ecuador do to justify Chevron’s BIT suit?
The Lago Agrio regional court issued a judgment in 2011, awarding $18.2 billion to the plaintiffs. In 2013 Ecuador’s National Court of Justice affirmed the judgment but reduced the amount to $9.5 billion. Chevron had no assets in Ecuador, so plaintiffs attempted to exemplify their judgment in the United States (and subsequently in other countries). But in 2014, After a seven-week trial, U.S. District Court Judge Kaplan ruled that the Lago Agrio judgment against Chevron was the product of “egregious” fraud by the plaintiffs’ lawyers and was therefore unenforceable in the U.S. Among other things, the court held in its nearly 500-page opinion that Ecuador’s courts and government colluded with the plaintiffs’ lawyers to further the extortion scheme. Earlier columns of mine detail the sordid history of what was actually determined to be a racketeering scheme sanctionable under RICO. Enforcement efforts in Canada, Argentina, Brazil and Gibraltar also failed, for a whole slew of reasons.

What is the nature of Chevron’s BIT claim?
To enforce its rights under the release agreements, Chevron filed an arbitration claim under the BIT in 2009 against Ecuador before the Permanent Court of Arbitration in The Hague. Chevron claims that Ecuador has violated its obligations under its contracts with TexPet and under the U.S.-Ecuador BIT, including its obligation to provide fair and impartial courts to resolve disputes.

What is Chevron seeking in its BIT claim?
Chevron is seeking four main types of relief: Specific performance: Chevron wants the Tribunal to order Ecuador to honor its obligation to release Chevron and affiliates from liability for environmental claims arising out of the Lago Agrio operations.

Declaratory relief:
Chevron wants the Tribunal to declare, among other things, that the Lago Agrio Judgment is null and void as a matter of international law; that Ecuador committed a denial of justice and breached numerous treaty obligations in issuing and enforcing the Lago Agrio Judgment; and that neither Chevron nor TexPet have any liability or responsibility for diffuse environmental claims in Ecuador arising out of the Consortium’s operations.

Injunctive relief:
Chevron wants the Tribunal to order Ecuador to abstain from further efforts to enforce or exemplify the fraudulent Ecuadorean judgment. Monetary damages Chevron wants full indemnification and damages against Ecuador, including all costs and attorneys’ fees, with pre-award and post-award interest.

Who are the BIT arbitrators?
Each party has picked an arbitrator from an expert panel. Chevron’s appointed arbitrator is Dr. Horacio A. Grigera Naón, Director of the Center on International Commercial Arbitration at the Washington College of Law at American University, and an independent international arbitrator and consultant on business and international law. Ecuador’s appointed arbitrator is Professor Vaughan Lowe, Emeritus Professor of Public International Law at Oxford University and a Fellow of All Souls College, Oxford. The two men chose the President of the Tribunal, Mr. V.V. Veeder, a Visiting Professor of Investment Arbitration at King’s College, University of London. President Veeder has practiced since 1972, specializing in commercial law and international trade, including foreign investment and international commercial arbitration.

What rulings have these BIT arbitrators issued so far?
The arbitration panel has already issued four interim awards to Chevron against Ecuador. In its latest award, the panel determined that Ecuador violated earlier interim awards by failing to “take all measures necessary to suspend or cause to be suspended” the enforcement and recognition of its judgment against Chevron. It has ordered Ecuador to show cause as to why it should not compensate Chevron for any harm caused by its actions in breach of the awards.”
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Michael Krauss writes a legal column for Forbes magazine.

Credit: Forbes: www.forbes.com