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04 February 2021
In the ongoing dispute between Ecuador and US energy multinational Chevron Corporation, The Hague District Court was again called upon to consider whether an award issued pursuant to the US-Ecuador bilateral investment treaty could be set aside. In 2006 and 2013 Ecuador had also attempted to set aside US-Ecuador investment treaty awards. Both proceedings were conducted up to the Supreme Court and resulted in the awards being upheld.(1)
At first glance, the award rendered is quite remarkable as the tribunal did not award any damages. Instead, it ordered Ecuador to immediately suspend the enforceability of a fraudulent national judgment. An award of remedies other than monetary damages, although permitted, is unusual in investment arbitration, to the extent that questions have arisen as to whether it is actually possible.
In its 16 September 2020 judgment, the court dismissed all setting-aside grounds against the second partial award on Track II, issued on 30 August 2018.(2) The arbitration proceedings were conducted under the United Nations Commission on International Trade Law Rules 1976 and administered by the Permanent Court of Arbitration, consisting of Dr Horacio Grigera Naón, Professor Vaughan Lowe and Queen's Counsel VV Veeder. Albert Jan van den Berg replaced Veeder as chair in early 2020.
The arbitration was divided into three phases (ie, 'tracks'). Track I mainly concerned preliminary questions and the question of jurisdiction. Track II also dealt partly with jurisdiction but mainly concerned the judgment on the merits. Track III deals with compensation claims against Ecuador.
Track II stemmed from the Lago Agrio judgment rendered by an Ecuadoran court against Chevron in 2011. Chevron was ordered to pay $9.5 billion to the plaintiffs, the inhabitants of Lago Agrio in the Amazon, due to the polluting activities of its indirect subsidiary, Texaco Petroleum Company (TexPet), in the region.
In 1964 TexPet became part of a consortium, to which Ecuador granted concessions for the exploration and extraction of oil in Lago Agrion in the Oriente region. The consortium and Ecuador concluded a settlement agreement in 1995 and a final release in 1998 (the agreements), which, in short, released the consortium from liability for environmental claims.
During the Lago Agrio proceedings, Chevron initiated arbitral proceedings. This resulted in an award in September 2013 in which the tribunal held that the agreements released Chevron and TexPet from "diffuse" environmental claims but not individual claims.
In 2014 the New York District Court ruled that the Lago Agrio judgment had been obtained through bribery of a judge.
In Track II the tribunal ruled that Ecuador had breached its obligations towards Chevron and TexPet for denial of justice under various international laws by failing to respond to the fraud allegations. The tribunal determined that Ecuador had to take, to the tribunal's satisfaction, immediate steps to render the fraudulent Lago Agrio judgment unenforceable.
Ecuador claimed before the court, among other things, that it was impossible to comply with the tribunal's order to prevent the Lago Agrio judgment from being executed in and outside Ecuador. The state argued that the award satisfied three of the four grounds for setting aside – namely, breach of mandate, failure to state reasons for the judgment and breach of public policy (Articles 1065(1)(c), (d) and (e) of the Dutch Code of Civil Procedure).
In general, tribunals are hesitant to award remedies other than monetary damages as the general perception is that such remedies involve a greater infringement of a state's sovereignty than an order for it to pay damages. Difficulties concerning the practicability and workability of how such an order should be shaped, as well as the fact that many investment treaties are silent on the question of remedies, also prevent tribunals from granting other forms of relief. This means that tribunals often overlook the benefits of such orders, such as:
Before The Hague court, Ecuador argued that the tribunal's orders entailed that the judgment must be annulled. According to Ecuador, this constituted an essential defence, breaching its mandate, which the tribunal should have considered in its award. In addition, it was contrary to public policy because decisions on this point are not substantiated.
The court did not agree with Ecuador's reading of the order. It considered that the tribunal had dealt extensively with this objection in a previous interim award. There was no question of an essential defence because it is a generally accepted principle of international law that a state cannot use its own national law to breach its obligations under international law. Finally, the award merely stated that the tribunal had the competence to order Ecuador to achieve the same result as that achieved by nullification by depriving the judgment of its enforceability. This was also made explicitly clear by the tribunal when Ecuador asked for an explanation of the orders.
Subsequently, Ecuador raised several objections to the award's design, which had the effect of, among other things, imposing an obligation of restitution and affecting sovereign acts of other states.
With regard to the objection on restitution, the court considered that the tribunal had given reasons why it considered the orders to be the appropriate form of reparation in accordance with international rules and relevant case law; thus, it had properly substantiated its findings. It was not for the court to decide whether the tribunal had correctly applied international law. It should be noted that restitution is common practice in inter-state litigation where a state is held liable for a wrongful act.(3) Reference is often made to the International Law Commission Draft Articles on State Responsibility, as was the case in the Track II award.
Ecuador's objection regarding the extra-territorial effect of the Track II award entailed that if sovereign states recognise and enforce the Lago Agrio judgment, notwithstanding Ecuador's warnings, Ecuador may unfairly be held liable for the actions of third states. The court agreed with Chevron that this reading was based on a too far-reaching interpretation of the orders. As indicated several times in its judgment and in the award, Ecuador was ordered to deprive the judgment of its enforceability. If, despite Ecuador's efforts, third states nevertheless enforce the Lago Agrio judgment, it is difficult to imagine that Ecuador could be held liable on that ground.
The ruling confirms The Hague District Court's positive view of investment arbitration and orders which are rather unconventional in such arbitration.
It remains to be seen whether the phrase 'third time lucky' will apply to Ecuador in view of its earlier attempts. However, the court seems to want the parties to focus on remedying the environmental damage rather than pursuing their legal battle. In its judgment, the court stated that it was difficult for it to comprehend that the parties were willing to spend such a large amount of money on legal proceedings when this money could have been used to address the real issue – the environmental damage.
For further information on this topic please contact Sandra Coelen or Basya Klinger at Freshfields Bruckhaus Deringer LLP by telephone (+31 20 485 7000) or email (firstname.lastname@example.org or email@example.com). The Freshfields Bruckhaus Deringer LLP website can be accessed at www.freshfields.com.
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