Substantial damages awarded to Perenco for FET breach and expropriation; Ecuador also awarded compensation under environmental counterclaim

Perenco Ecuador Limited v. Republic of Ecuador, ICSID Case No. ARB/08/6

A long-standing tribunal under the France–Ecuador BIT has issued its final award on compensation. The award orders Ecuador to compensate oil and gas investor Perenco Ecuador Limited (Perenco) almost USD 449 million for Ecuador’s imposition of a 99 per cent windfall profit tax and subsequent expropriation of the investment. Under the host state’s environmental counterclaim, the tribunal ordered the investor to compensate Ecuador USD 54 million.

Background and claims

Perenco is an Ecuadorian subsidiary of a multinational oil and gas company. Perenco invested in Ecuadorian participation contracts for two hydrocarbon blocks in the Amazon (Block 7 and Block 21).

As oil prices rose, Ecuador imposed windfall taxes ultimately reaching 99 per cent on oil exports. Subsequently, Ecuador’s state-owned oil company Petroecuador took over the operation of both blocks.

In April 2008, Perenco initiated ICSID arbitration against Ecuador and Petroecuador. Ecuador’s December 2011 counter-memorial raised an environmental counterclaim and an infrastructure counterclaim.

In its 2014 Decision on Remaining Issues of Jurisdiction and on Liability, the tribunal found Ecuador liable for the violation of the BIT’s FET and expropriation provisions as well as the underlying investment contracts. In its 2015 Interim Decision, the tribunal indicated that it would likely hold Perenco liable for compensation under the counterclaims, while inviting the parties to reach an amicable settlement and postponing the decision on the counterclaims.

The tribunal’s award of September 27, 2019, which is reviewed below, addressed both the compensation to be paid by Ecuador to Perenco under the BIT and the participation contracts, on the one hand, and the compensation to be paid by Perenco to Ecuador under the counterclaims, on the other.

Of note, Perenco invested in the contracts as part of a consortium with Burlington Resources Inc. Burlington pursued a separate arbitration under the United States–Ecuador BIT. In December 2012, that tribunal found Ecuador had unlawfully expropriated Burlington’s investments. On February 7, 2017, the Burlington tribunal quantified the damages owed to Burlington at USD 380 million and awarded USD 41 million to Ecuador under its environmental and infrastructure counterclaims.

Tribunal staggers valuation of BIT and contract breaches

The tribunal began by recalling that the assessment of damages “whether in contract, tort or under a treaty, is ‘not an exact science’” (para. 69) and that its task was not to consider questions of economic theory. Instead, it focused its analysis on the appropriate dates for valuing the investor’s damages for each breach.

The investor argued that its expropriation under the contract in 2010 was the relevant date for the valuation of damages. Ecuador responded that it was necessary to distinguish between damages stemming from the FET violation, which had taken place in 2007, and the expropriation, which occurred in 2010.

The tribunal agreed with Ecuador that it should employ two valuation dates. Specifically, it determined the damages due to the FET breach as starting on the date thereof and running until the date of expropriation. It then determined, through a discrete analysis, the damages from the date of the expropriation onward.

Extension of participation contract was likely but tribunal cannot speculate about terms

More than a third of Perenco’s total request was based on its expectation that the participation contracts would have been extended. Ecuador insisted on its discretion and that an extension would have been unlikely. The tribunal disagreed, on the basis that most similar contracts in Ecuador had been extended and that technical complexity of oil extraction favoured maintenance of the status quo.

The tribunal, however, declined to endorse Perenco’s submissions about the terms of an eventual extension. It found that while the investor should be compensated for the loss of opportunity to agree to an extension, it was also the case that “any estimation of the value of the loss of opportunity is an exercise of discretion and therefore [the tribunal] decided to award a nominal value” of USD 25 million (paras. 324–326).

Ecuador’s claim of contributory fault is not sustained

Ecuador argued that Perenco’s compensation should be reduced on the basis of its contributory fault.

The tribunal recalled Article 39 (Contribution to the Injury) of the International Law Commission (ILC) Draft Articles on the Responsibility of States for Internationally Wrongful Acts: “In the determination of reparation, account shall be taken of the contribution to the injury by wilful or negligent action or omission of the injured State or any person or entity in relation to whom reparation is sought.”

The tribunal found that while the inclusion of the word “wilful” broadens the scope of Article 39 beyond negligence, such broadening was not substantial. It therefore proceeded on the basis that in order for Ecuador’s submissions to succeed, the tribunal must be satisfied that Perenco manifested a lack of due care for its own property or rights. As such, the tribunal rejected the alleged contributory fault.

Tribunal considers potential reconsideration of jurisdiction over counterclaims

Turning to the counterclaims, Perenco had asked the tribunal to reconsider certain earlier decisions bearing on jurisdiction over the counterclaim.

First, Perenco argued that it should be considered an alter ego of its consortium partner, Burlington. This argument had been rejected in 2017 and 2018, as jurisdiction over the counterclaim was seen by a majority of the tribunal’s members as an already adjudicated matter (res judicata). The same two arbitrators affirmed that position in the award.

Second, Perenco argued that the substance of either the Burlington award or the settlement agreement between Burlington and Ecuador negated the Perenco tribunal’s jurisdiction over the counterclaim. Although arbitrator Kaplan dissented, the majority rejected these arguments.

Independent expert’s report reveals “contamination egg” at the blocks

Ecuador alleged that Perenco had left behind an environmental catastrophe necessitating approximately USD 2.5 billion in compensation. Perenco argued that its liability did not exceed USD 10 million.

Following the 2015 Interim Decision and the parties’ failure to negotiate a settlement of the environmental counterclaim, the parties jointly appointed an independent expert tasked with reporting back to the tribunal on the costs of remediating the environmental damage.

The tribunal makes extensive reference to the independent expert report, which concluded that the cost of remediating the total measured contamination in Blocks 7 and 21 amounted to almost USD 160 million.

Tribunal attempts to unscramble “the contamination egg”

Perenco attempted to persuade the tribunal that other operators were responsible for most of the contamination. Ecuador responded that a failure to prove that other operators had caused the contamination meant that Perenco must be responsible. The central question for the tribunal was thus how much of the contamination was Perenco’s responsibility.

The tribunal was willing to attribute some liability to past operators. Although specific evidence was limited, the arbitrators considered that past operations had taken place under domestic environmental regulations that were less demanding.

It ultimately determined that more than USD 93 million of the remediation estimate was attributable to Perenco’s operations. However, it also considered that Perenco’s operation had taken place as part of a consortium with Burlington, and therefore returned to the contentious relationship between the Burlington and Perenco counterclaims.

In short, the tribunal concluded that it could subtract the USD 39 million paid by Burlington for Ecuador’s environmental counterclaim from the approximately USD 93 million required for remediation. As a result, it ordered Perenco to pay Ecuador slightly more than USD 54 million under the environmental counterclaim.

Second counterclaim yields no extra damages, as Burlington tribunal already compensated Ecuador

The Burlington tribunal had awarded Ecuador approximately USD 2.5 million under the infrastructure counterclaim. The Perenco tribunal declined to award anything, given that Ecuador had submitted almost identical claims in the two proceedings as regards this second counterclaim, and that the Burlington award had entrusted the Perenco tribunal with guarding against double recovery.

Tribunal declines to direct Ecuador on how to spend compensation

Perenco had requested, and Ecuador had agreed, that the host state be ordered to deposit the counterclaim monies into an environmental remediation fund. The tribunal, however, declined to follow the parties. It saw such “continued monitoring” as inconsistent with the role of an ICSID tribunal.

Dispute between parties continues over enforcement of award

Perenco filed a petition to enforce the award in the United States, dated October 3, 2019. Ecuador initiated ICSID annulment proceedings, registered on October 4, 2019, and obtained a stay of enforcement.

Notes: The tribunal was composed of Peter Tomka (president appointed by ICSID Administrative Council, Slovak national), Neil Kaplan (claimant’s appointee, English national) and J. Christopher Thomas (respondent’s appointee, Canadian national). The award of September 27, 2019 is available at  https://www.italaw.com/sites/default/files/case-documents/italaw10837.pdf