Ecuador defies provisional measures in dispute with French oil company

By Damon Vis-Dunbar, Investment Treaty News
8 June 2009

An ICSID tribunal authorized provisional measures on May 8th in an effort to stop the Government of Ecuador from seizing assets belong to the French oil company Perenco. Nonetheless, the state-owned Petroecuador attempted a week later to auction 1.4 million barrels of oil confiscated from Perenco, although no bidders stepped forward to purchase the oil.

Ecuador is seeking US$327 million owed under a windfall tax enacted in 2006 (Law 42)—a tax Perenco contests is in violation of its contract with Ecuador and the France-Ecuador bilateral investment treaty.

Perenco’s application for provisional measures was in response to “coercive measures” announced by Ecuador in February, which led to the seizure of oil produced by Perenco a month later. Perenco requested provisional measures to preserve its existing contract with Ecuador, and prevent Ecuador for taking action to collect the payments due under the windfall tax.

In its May 8th decision, the Tribunal granted the provisional measures, having concluded that the seizure of Perenco’s assets risked “crippling” the company’s business in Ecuador.

The tribunal also recommended that Perenco deposit the contested tax payments into an escrow account, which would be released to Ecuador in the case that the tribunal declines jurisdiction, or finds that Ecuador is within its rights to enforce payment of the taxes. Ecuador and Perenco have been given 3 months to agree on terms and conditions for the escrow account.

Tribunal stresses legal consequences of provisional measures

Although ICSID tribunals are empowered to “recommend” rather than “order” provisional measures, the tribunal maintains that ICSID provisional measures carry “legal consequences”. After referring to case law from ICSID, the International Court of Justice, and the European Court of Justice, the tribunal submits that state parties to the ICSID Convention are inherently “under an international obligation to comply with provisional measures issued by an ICSID tribunal”.

However, the repercussions of non-compliance are not provided; the tribunal simply states that it “would have to take a serious view of any failure to comply with its request.”

A tribunal hearing a contract dispute over the oil windfall tax (City Orient v. Ecuador) also issued provisional measures against Ecuador in a 2007 decision. In this case, the tribunal called on Ecuador to refrain from prosecuting representatives of the oil company City Oriente, and to cease demanding payment of the windfall royalty tax. Yet Ecuador’s General Prosecutor proceeded to seek the arrest of several of City Oriente’s Quito-based in employees, despite the provisional measures.