Tribunal rejects Ecuador’s jurisdictional objections in dispute with Chevron

By Fernando Cabrera Diaz
Investment Treaty News
5 January 2009

A tribunal has determined that it holds jurisdiction to hear a claim brought by Chevron Corporation against Ecuador for alleged violations of the Ecuador-United States bilateral investment treaty (BIT).

Chevron claims that Ecuador violated the BIT by failing to deal fairly with multiple breach-of-contract cases filed against the state by Texaco Petroleum (Chevron acquired Texaco in 2001.)

From the outset Ecuador objected to the tribunal’s jurisdiction, in part by arguing that Chevron’s claim amounts to an abuse of right. Ecuador accuses Chevron of using the arbitration to discredit Ecuador’s judiciary in order to undermine a potential award against it in a court case in Lago Agrio, Ecuador.

The Lago Agrio claim is led by a group of Ecuadorian citizens for alleged environmental degradation caused by the Texaco’s drilling activities. These citizens had originally filed a claim in the United States (Aguinda v. Texaco), but Texaco convinced U.S. courts that the Ecuadorean courts are the proper forum for settling the dispute.

Despite its earlier endorsement of the Ecuadorian judiciary, as Chevron argued in favour of having the Aguinda case moved to Ecuador, the company alleges that since 2004 the Ecuadorean courts have ceased to be independent in the wake of several political purges of Ecuador’s Constitutional, Electoral and Supreme Courts.

Giving Chevron the benefit of the doubt, the tribunal’s 1 December 2008 ruling decided that it could not “exclude the possibility that subsequent developments or other factors sufficiently explain any potential conflicts between the submissions before the U.S. courts and those before this Tribunal about the fairness of Ecuadorian courts.”

Among the other jurisdictional objections, Ecuador argued that the claimant’s investments were wrapped up well before 1997, the year the BIT entered into force. The tribunal also rejected this position, holding that while Texaco had wrapped up its drilling operations before 1997, the claims before Ecuadorian courts constituted part of the investment, and therefore fell under the BIT’s jurisdiction.

Mark Clodfelter, counsel for Ecuador, told ITN: “While we are disappointed in the decision, we are gratified that the Tribunal wishes to further consider the issues of Chevron's and Texaco's abuse of rights in having praised the Ecuadorian judicial system for so many years to obtain dismissal of cases against them in U.S courts.”

The Chevron-Ecuador dispute is rooted in a 1973 contract between Texaco and Ecuador, under which Texaco was granted exploration and exploitation rights to several oil reserves in the country. Texaco agreed to sell Ecuador a share of the crude oil to meet domestic consumption needs, at a set price, while any excess crude was to be sold by the company at the higher prevailing international price.

Between 1990 and 1993, Texaco filed seven breach-of-contract claims against Ecuador and its state organs, alleging that the country had violated the 1973 contract by overstating domestic consumption needs.

According to Chevron, in a series of six cases Texaco took all necessary steps under Ecuadorean law to demand final decisions from Ecuadorean courts. Yet, the company alleges that twelve different judges in three different courts have so far failed to render a decision. Meanwhile, since Chevron’s notice of arbitration was provided to Ecuador in May of 2006, the company alleges that politically controlled courts have unjustly ruled against it in several of its cases.

Ecuador has countered that “what Chevron portrays as bona fide lawsuits were in fact, as its own internal documents show, commenced solely to obtain tactical advantage in its negotiations with the Republic while it was withdrawing completely from the country.

“The delays that Chevron portrays as aimed at [Texaco] were in fact the ordinary delays suffered by derelict plaintiffs of all nationalities in Ecuador’s overtaxed judicial system,” adds Ecuador.