Occidental Petroleum Corp. and Occidental Exploration and Production Co. v. Republic of Ecuador, ICSID Case No. ARB/06/11 (Decision on Jurisdiction)

(Originally published in 2011 in International Investment Law and Sustainable Development: Key cases from 2000–2010; republished on this website on October 18, 2018. Read more here.)

Decision available at https://www.italaw.com/cases/767

Keywords

Contractual waiver of treaty rights, jurisdiction, waiting periods

Key dates

Request for Arbitration: 17 May 2006

Constitution of Tribunal: 6 February 2007

Decision on Provisional Measures: 17 August 2007

Decision on Jurisdiction: 9 September 2008

Award: 5 October 2012

Arbitrators

Mr. L. Yves Fortier (president)

Mr. David A. R. Williams (claimant appointee)

Prof. Brigitte Stern (respondent appointee)

Forum and applicable procedural rules

International Centre for Settlement of Investment Disputes (ICSID)

ICSID Rules of Procedure for Arbitration Proceedings

Applicable treaty

United States–Ecuador Bilateral Investment Treaty (BIT)

Alleged treaty violations

• Expropriation
• Fair and equitable treatment

Other legal issues raised

• Jurisdiction—contractual waiver of treaty rights
• Jurisdiction—waiting periods

1.0 Case Summary

1.1 Factual Background

In May 1999, Occidental Exploration and Production Company (OEPC) entered into a “Participation Contract” with Ecuador and its state-owned oil company, Petroecuador, under which OEPC was granted the exclusive right to carry out hydrocarbon exploration and exploitation in the area of the Ecuadorian Amazon known as “Block 15.” In October 2000, OEPC entered into two agreements with a subsidiary of EnCana Corporation (a major Canadian oil and gas company). Under these two agreements, OEPC granted EnCana’s subsidiary a 40 per cent economic interest in the share of production from Block 15, in return for annual payments toward capital investments and operating costs over the following four years. The agreements envisaged that OEPC would assign legal title of the 40 per cent interest to EnCana’s subsidiary at the end of the four years.

Four years later, however, when OEPC requested approval from the Ecuadorian government to proceed with the transfer of legal title to EnCana’s subsidiary, the government refused. Rather, the Attorney General of Ecuador issued orders to the Ministry of Mines and Energy to terminate the Participation Contract through a declaration of “Caducidad” (meaning “expiration”). The Attorney General alleged that OEPC had, inter alia, transferred rights and obligations under the Participation Contract without ministerial approval and repeatedly committed violations of the Hydrocarbons Law and regulations.

During the following roughly 18 months, OEPC sought to rebut the allegations made by the Attorney General, but to no avail. In May 2006, the Minister of Energy and Mines notified OEPC of his decision to terminate the Participation Contract by declaring its Caducidad. OEPC and its corporate parent, Occidental Petroleum Corporation (together, “the Claimants”), filed their Request for Arbitration two days later (paras. 10–20[1]).

1.2 Summary of legal issues and decision on jurisdiction

In the arbitration proceedings, still ongoing at the time of this summary’s publication, the Claimants have asked the Tribunal to declare that Ecuador breached its obligations under the United States–Ecuador Bilateral Investment Treaty (U.S.–Ecuador BIT), the Participation Contract, international and Ecuadorian law. The Claimants have sought an order for Ecuador to pay the fair market value of the Participation Contract (US$2.705 billion) plus consequential damages (US$201.2 million) (para. 22).

Subsequent to filing their request for arbitration, the Claimants also sought provisional measures, inter alia, to order Ecuador to immediately cease its occupation of Block 15 and OEPC’s facilities and to enjoin Ecuador from entering into a contract with another party to carry out exploration and exploitation activities on Block 15. In its Decision on Provisional Measures dated 17 August 2007, however, the Tribunal declined to order the requested provisional relief on the ground that the Claimants failed to demonstrate that damages would not be an adequate remedy.

Ecuador subsequently filed preliminary objections to jurisdiction. By decision dated 9 September 2008, the Tribunal rejected all of Ecuador’s objections to jurisdiction and held that it had authority to determine the claims brought under both the U.S.–Ecuador BIT and the Participation Contract. Although the Tribunal’s award on the merits is still pending, its Decision on Jurisdiction, dated 9 September 2008, considered several interesting legal issues.

2.0 Select Legal Issues

The Decision on Jurisdiction in this case is important in two respects. First, the decision is notable for the Tribunal’s finding that, to be effective, a contractual clause under which an investor waives its right to arbitration under a BIT must be clear and unequivocal; silence is not enough. Moreover, the host state cannot use its domestic law to get around its international obligations. The import of this finding is that if host states wish to exclude certain types of investment disputes from international arbitration under a BIT, they must do so in clear and unequivocal language within the BIT itself.

Second, the decision is notable for the Tribunal’s view that where negotiations are bound to be futile, there is no need for the investor to wait out the full waiting period set out in a BIT’s dispute resolution clause before commencing arbitration proceedings. In doing so, the Tribunal chose to disregard the clear and express wording of the U.S.–Ecuador BIT.

2.1 Contractual waiver of investment treaty arbitration

In its first objection to jurisdiction, Ecuador argued that the ICSID Tribunal did not have jurisdiction over the parties’ dispute because the Participation Contract “carved out” and/or waived Caducidad decrees from arbitration. Ecuador asserted that, pursuant to the Participation Contract and Ecuadorian law (which stipulates that Caducidad decrees may only be challenged before the Ecuadorian administrative courts), the Tribunal could not hear the case.

Ecuador cited Clauses 21.4 and 22.2.1 of the Participation Contract in support of its position. Clause 21.4 stated:

The termination of this Participation Contract for any reason other than those that result in caducidad may be requested by either of the Parties, subject to procedures stipulated in Clause 20 in the event that they fail to reach agreement.

Clause 20 provided, inter alia, for disputes related to the performance of the contract to be resolved by ICSID arbitration.[2]

Clause 22.2.1 of the Participation Contract stated:

In the event of controversies that may arise as a result of the performance of this Participation Contract, in accordance with Ecuadorian law, Contractor expressly waives its right to use diplomatic or consular channels, or to have recourse to any national or foreign jurisdictional body not provided for in this Participation Contract, or to arbitration not recognized by Ecuadorian law or provided for in this Participation Contract. Lack of compliance with this provision shall constitute grounds for the forfeiture of this Participation Contract.

Ecuador claimed that through Clauses 21.4 and 22.2.1, OEPC had waived its recourse to ICSID arbitration in the event of a Caducidad-related dispute under the Participation Contract and that, in accordance with Ecuadorian law, the Ecuadorian administrative courts had exclusive jurisdiction over such disputes. Ecuador admitted that Clause 21.4 did not address the resolution of Caducidad-related disputes per se, but submitted that this was a “purposeful” omission:

Clause 21 deals with termination in general, and it states that with respect to a non-Caducidad termination, arbitration is available. It does not, however, speak to a Caducidad determination, and we believe that the omission is purposeful, and that it reflects the point of Ecuadorian law, that one cannot have arbitration with respect to Caducidad. (para. 84, emphasis in original)

The Tribunal, however, considered Ecuador’s view to be a misreading of the Participation Contract, particularly of Clause 20, which provided for ICSID arbitration in the event of any dispute related to the Participation Contract’s performance. The Tribunal held that, under elementary principles of contract interpretation, any exception to the availability of ICSID arbitration for the resolution of disputes arising under the Participation Contract required clear language to this effect. The Tribunal affirmed the view of the tribunal in the earlier case of Aguas del Tunari v. The Republic of Bolivia,[3] which stated, “The Tribunal will not read an ambiguous clause as an implicit waiver of ICSID jurisdiction; silence as to the question is not sufficient” (para. 85). After affirming this view, the Tribunal added that more fundamentally, the Respondent could not invoke its domestic law for the purpose of avoiding ICSID jurisdiction under the U.S.–Ecuador BIT. The Tribunal held that, had the parties wished to exclude Caducidad-related disputes from ICSID jurisdiction and confer exclusive jurisdiction to the Ecuadorian administrative courts in this regard, they could have done so through express wording. They did not, and the Tribunal would not imply such wording into the clauses (paras. 63–89).

2.2 Disregarding the required treaty waiting period before commencing arbitration

Ecuador’s second jurisdictional objection was that the Claimants had commenced arbitration proceedings without waiting six months as required by the U.S.–Ecuador BIT. Article VI.3 stated:

Provided that the national or company concerned has not submitted the dispute for resolution under paragraph 2 (a) or (b) and that six months have elapsed from the date on which the dispute arose, the national or company concerned may choose to consent in writing to the submission of the dispute for settlement by binding arbitration.

The Tribunal noted that the Caducidad procedure at issue in this arbitration was, in fact, initiated in 2004 and that for approximately eighteen months prior to the issuance of the actual Caducidad decree in May 2006, OEPC had sought to rebut the government’s allegations, but to no avail. The Tribunal noted that a number of earlier tribunals had confirmed that where negotiations are bound to be futile, there is no need for the waiting period to fully lapse.[4] The Tribunal accepted that attempts at reaching a negotiated solution in this case were indeed futile, and Ecuador’s second jurisdictional objection was accordingly denied (paras. 90–95).

Notes

[1] All references to paragraphs are from the Tribunal’s Decision on Jurisdiction.

[2] Clause 20 of the Participation Contract, entitled “Consultants and Arbitrations,” states:

20.3 Notwithstanding the foregoing provisions, from the date on which the Agreement on the Settlement of Differences Relative to Investments among States and the Nationals of Other States (the “Agreement”) signed by the Republic of Ecuador as a Member State of the International Bank for Reconstruction and Development, on January 15, 1986 and published in Official Gazette No. 386 of March 3, 1986, is ratified by Congress of Ecuador, the Parties agree to submit their controversies or differences that are related to or arise from the performance of this Participation Contract, to the jurisdiction and competence of the International Center for the Settlement of Investment-Related Differences (“CIADI”) so that they be arranged and resolved according to the provisions of said Agreement. Under this system of arbitration, the following provisions shall be applied: […]

20.4 Additionally, and without prejudice to the provisions in Clauses 20.2 and 20.3 of this Participation Contract, the Parties agree to submit any difference relating to investments to Treaties, Conventions, Protocols and other acts under international law, signed and ratified by Ecuador in accordance with the Law.

[3] ICSID Case  No. ARB/02/3, Decision on  Respondent’s  Objections to  Jurisdiction  dated 21 October 2005.

[4] Lauder v. Czech Republic, Award dated 3 September 2001 at paragraphs 187–191; Consorzio Groupement L.E.S.I. DIPENTA v. People’s Democratic Republic of Algeria, ICSID Case No. ARB/03708, Award dated 10 January 2005 at paragraph 32(iv);  SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/10/13, Decision on Jurisdiction dated 6 August 2003 at paragraph 184; and Ethyl Corp. v. The Government of Canada, Award on Jurisdiction dated 24 June 1998 at paragraph 84.