PCA Tribunal ‘Benchslaps’ Ecuador in Ongoing Chevron-Lago Agrio Dispute

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An interesting development in the Lago Agrio/Chevron litigation battle , which was the subject of my  Guest Post: Comments on the Lago Agrio Plaintiffs Enforcement Action in Canada at Ted Folkman’s Letters Blogatory.

Via the Juicio Crudo Blog (original in Spanish):

 An international arbitration court yesterday issued a ruling in which it concludes that the Republic of Ecuador has violated previous interim awards of the same court authorized under international law and a treaty between the United States and Ecuador to not attempt to prevent the execution of a sentence of 19,000 million against Chevron Corp. (NYSE: CVX). In previous decisions, the court warned that if the arbitration Chevron ended imposing “any loss arising from the implementation (of the judgment) would be losses for which (the Republic) would be responsible (with Chevron) under international law.”

Convened under the authority of the Bilateral Investment Treaty (BIT, according to its acronym in English) between the United States and Ecuador, and administered by the Permanent Court of Arbitration at The Hague, the tribunal found that Ecuador breached previous court rulings and ordered to explain why the Republic should not be ordered to pay compensation to Chevron for all damages resulting from attempts by plaintiffs to enforce a judgment arising out of an environmental lawsuit against the company in Lago Agrio, Ecuador.

Ted Folkman has posted a copy of the Tribunal’s Interim Award available here.

At para. 31 of the Interim Award, the Tribunal refers to the Claimants’ letter dated 1 June 2012 (pp. 2-3), whereby Chevron  requested that the Tribunal issue a further interim award deciding as follows:

“(i) declaring that Ecuador is in breach of the First and Second Interim Awards on Interim Measures;

(ii) declaring that, on account of Ecuador’s breaches of the Tribunal’s Interim Awards, Ecuador is responsible for, and shall reimburse Claimants for any and all attorneys’ fees, costs, and other expenses incurred in defending, or preparing to defend against, recognition and enforcement actions related to the Lago Agrio Judgment; and 

(iii) cancelling the US$50 million bond requirement imposed by the Second Interim Award, returning the funds deposited by Claimants, and otherwise maintaining and reaffirming all other orders and aspects of the Second Interim Award.”

For further background, I commend you to Ted Folkman’s recent post where he lays his Cards on the Table.

The arbitration is under the auspices of the U.S.-Ecuador Bilateral Investment Treaty (the “BIT”). According to Chevron’s website:

Chevron’s arbitration claim stems from the government of Ecuador’s exploitation of the ongoing environmental lawsuit against the company in Ecuador and its courts’ failure to administer justice in a trial that has been marred by fraud. Additionally, Chevron maintains that the government of Ecuador has failed to uphold prior settlement and release agreements that the government of Ecuador entered into with Texaco Petroleum Company (now a Chevron subsidiary) when the consortium between Texaco Petroleum and Petroecuador was terminated.

The Tribunal’s Reasons are reproduced as follows:

77. The Tribunal confirms and restates with full force and effect its earlier orders and awards on interim measures. Each of these orders and awards was and remains binding upon the Parties under the Treaty, the UNCITRAL Rules and international law. Under Article VI of the Treaty and Article 32(3) of the UNCITRAL Rules, the Parties undertook to carry out any award without delay, including the First and Second Interim Awards on Interim Measures of 25 January and 16 February 2012.

78.  As regards the Respondent, these orders and awards were directed not only to the Respondent’s executive branch but to all branches and organs that make up the Respondent as a State, including its judiciary and legislature. Neither disagreement with the Tribunal’s orders and awards on interim measures nor constraints under Ecuadorian law can excuse the failure of the Respondent, through any of its branches or organs, to fulfil its obligations under international law imposed by the Treaty, the UNCITRAL Rules and the Tribunal’s orders and awards thereunder, particularly the First and Second Interim Awards on Interim Measures.

79.  The Tribunal determines that the Lago Agrio Judgment was made final, enforceable and subject to execution within Ecuador by the Respondent no later than 3 August 2012 (upon its judiciary’s certifying the Lago Agrio Judgment’s enforceability), in violation of the Tribunal’s First and Second Interim Awards requiring the Respondent, respectively, “to take all measures at its disposal” and “to take all measures necessary” to suspend or cause to be suspended the enforcement and recognition both within and without Ecuador of that Lago Agrio Judgment.

80. Thereafter, the status accorded by the Respondent to the Lago Agrio Judgment led directly to what the Tribunal was seeking expressly to preclude temporarily by its orders and awards on interim measures, namely the attempted enforcement and execution of the Lago Agrio Judgment against the First Claimant (with its subsidiary companies) by persons acting in the name of the Lago Agrio plaintiffs not only within but also outside Ecuador, currently in the state courts of Canada, Brazil and Argentina and possibly in the near future also in the state courts of other countries.

81. Accordingly, the Tribunal requires the Respondent to show cause to this Tribunal why the Respondent should not now compensate the First Claimant for any harm caused by the Respondent’s violations of the First and Second Interim Awards in regard to the Lago Agrio Judgment’s enforcement and execution, both within and outside Ecuador. The Tribunal intends presently to establish a further procedural timetable to address such compensation (including any issues as to causation and quantification) in consultation with the Parties, by a further procedural order.

82. Moreover, from its perspective under international law, this Tribunal is the only tribunal with the power to restrain the Respondent generally from aggravating the Parties’ dispute and causing irreparable harm to the Claimants in regard to the enforcement and execution of the Lago Agrio Judgment. Such restraint has not been achieved by any state court (including courts in the USA); nor could it be in the circumstances of this most unusual case. The Tribunal therefore confirms and declares, as a matter of international law, that the Respondent has a continuing obligation to ensure that the commitments that it has given under the Treaty and the UNCITRAL Rules are not rendered nugatory by the finalisation, enforcement or execution of the Lago Agrio Judgment in violation of the First and Second Interim Awards.

83.  The Tribunal bears much in mind that the amounts at stake are potentially huge in these arbitration proceedings, measured in multiple billions of US dollars. For the Claimants, that means that an award of damages expressed in tens of billions of US dollars could provide no adequate remedy, if their full case were to prevail against the Respondent and if the Lago Agrio Judgment were in the meantime enforced and executed. Conversely for the Respondent, on these same assumptions, that means an award of damages could nonetheless be recovered by the Claimants, albeit not in tens of billions, but in many millions or even billions of US dollars.

84.  The Tribunal also takes note that the first part (probably a substantial part) of any recoveries on execution of the Lago Agrio Judgment outside Ecuador appears unlikely to be paid to the Lago Agrio plaintiffs in Ecuador, but rather to foreign funding and other financial institutions associated with persons acting in their name, based in countries other than Ecuador.

85.  It is therefore difficult now to exaggerate the risks facing the First Claimant and thus, indirectly, the Respondent also from the enforcement and execution of the Lago Agrio Judgment. In the Tribunal’s view, based on the materials filed by both sides in this arbitration, there are increasingly grave risks that enforcement and execution of the Lago Agrio Judgment against the First Claimant (with its subsidiary companies) will imperil to a very significant extent the overall fairness and the efficacy of these arbitration proceedings.

86.  In accordance with the existing timetable requested by the Respondent, the Tribunal has yet to decide any of the substantive merits of this dispute; and nothing in any order or award (including this award) should be read as pre-judging any of those merits.

Certainly a creative bit of advocacy on the part of Chevron’s lawyers in employing public international law and international arbitration to derail a private international law dispute. I remain dubious, however, that the Tribunal has jurisdiction over the subject-matter of the underlying Lago Agrio judgment, or the Lago Agrio plaintiffs who were are not parties to the BIT arbitration.

In other words, since when does a BIT/investor-state tribunal have jurisdiction to direct a State to impose a stay or suspension of execution of a judgment, rendered by the State’s court involving private parties?  A partial answer is gleaned from the Tribunal’s Third Interim Award on Jurisdiction and Admissibility which reads in part:

4.26 The Tribunal declines to cut this Gordian knot at this early stage of these arbitration proceedings: it will need a much better understanding of the legal reasons why Chevron is to be treated in the Lago Agrio litigation as a party succeeding to Texaco’s liabilities which arose before the “merger” in 2001; and it will also need a clearer understanding of what constituted such “merger” as regards the different and successive legal relationships between Texaco, TexPet and Chevron before and after such “merger”, under whatever applicable law or laws, namely the laws of the USA and/or Ecuadorian law. 

4.27 Accordingly, for the time being, the Tribunal makes no final decision in regard to the Respondent’s jurisdictional objection to Chevron’s own claims as a direct investor under Article VI(1)(c) of the BIT, save to join that particular objection to the merits under Article 21(4) of the UNCITRAL Arbitration Rules. In addition, the Tribunal’s jurisdictional decision to treat Chevron as an indirect investor should not be understood as indicating (one way or the other) that Chevron would be entitled to all the relief claimed by Chevron in paragraph 547 of the Claimants’ Memorial on the Merits (cited in Part I above). That is also a matter for the merits phase of this arbitration.

The Tribunal does concede it has no jurisdiction over the Lago Agrio plaintiffs based upon the ‘consent’ principle in international arbitration, noting:

4.65 First, the ‘consent’ principle: it is clear that this Tribunal does not have jurisdiction over the Lago Agrio plaintiffs themselves. That is the case both in the context of applications for interim measures and in the context of any further proceedings on the merits in this arbitration. One consequence is that the Tribunal has no legal authority over the Lago Agrio plaintiffs and cannot order them to do or to abstain from doing anything. At most, the Tribunal could request the Lago Agrio plaintiffs to follow a certain course of action. On the other hand, the Tribunal does have jurisdiction over Chevron and TexPet as Co-Claimants and also (subject to its jurisdictional objections) over the Respondent in this arbitration, under the Arbitration Agreement. (Id., Tribunal’s Third Interim Award on Jurisdiction and Admissibility)

I do, however, remain troubled by the allegations of fraud that permeate these proceedings. A finding of fraud by a U.S. court, or perhaps the Hague PCA Tribunal, will vitiate any enforcement prospects of the Lago Agrio judgment in Canada, and likely, elsewhere. However, until such factual findings are finally and conclusively made, it is all speculation at this stage.

That said, where Chevron deliberately moved on forum non conveniens grounds, it is difficult to reconcile that Chevron can now resile from this tactical decision by attempting to impeach the Ecuador judgment on grounds of jurisdictional fraud. While it may appear unfair, res judicata and cause of action estoppel sometimes operate unfairly, but finality is a cornerstone of the foreign judgment enforcement regime. Had Chevron not sought out Ecuador as a convenient forum, then it would have left open the arguments for intrinsic fraud.

Res judicata operates both ways; ‘recognition’ applies to the foreign judgment against the plaintiff dismissing its claim in the foreign court, while ‘enforcement’ applies to the foreign judgment against the defendant granting the plaintiff’s claim in the foreign court.

Trying to attack the merits circuitously is antithetical to the underlying conflict of laws principles at play here. If there are other grounds to impeach the judgments, such as lack of due process, and public policy grounds, then it will necessarily be an indictment on the entire Ecuadorean political and judicial system; such an indictment most judges and courts are loath to declare.

If Chevron won and sought recognition of an Ecuadorean judgment dismissing the action in the SDNY, then res judicata and cause of action estoppel would operate in its favour. Instead, Chevron lost and opposes enforcement because of alleged systemic judicial and political corruption.

Chevron was forum shopping. It chose to buy goods at Ecuador ‘r Us. Now it wants a refund for the defective judgment. Volenti non fit injuria?

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