By Damon Vis-Dunbar
29 August 2008
The electricity provider Electroquil SA has been awarded US$ 5,578,566 plus interest stemming from several breaches of power purchase agreements (PPAs) backed by the government of Ecuador. While Ecuador was also found to have breached the Ecuador-US bilateral investment treaty, those violations did not result in additional monetary damages.
The dispute, filed within 2004, arises out of agreements between Electroquil, an Ecuadorian company in which the Delaware-based Duke Energy acquired an ownership interest in 1998, and INECEL a state-owned power company.
Electroquil was to receive a guaranteed price for the supply of electricity, and in return it would guarantee delivery of certain amounts of power. Should the company fail to meet these benchmarks, INECEL was permitted to penalize the company. A year into the agreement, INECEL began fining Electroquil; by 2002 these fines amounted to over US$ 8 million.
The fines, which the Claimants argued were improperly levied, formed part of the claim. The Claimants also charged that a payment trust envisioned under the PPAs was not properly established, invoices were often not paid on time, and interest not paid on the late payments.
The claim consisted of two other complaints which were not successful: that customs duties were levied on two turbines when they should have been tariff free; and that Ecuador failed to entertain the claimants’ suits in local arbitration.
The Claimants invoked an arbitration agreement as the primary basis for the Tribunal’s jurisdiction. However, they backed up their claim by also citing the Ecuador-United States bilateral investment agreement, in the event that jurisdiction under the arbitration agreement was declined.
This move could have proved significant, for while the Tribunal asserted jurisdiction over some of the claims—those relating to fines and penalties—it found that the arbitration agreement did not extend to claims related to customs duties. Jurisdiction was ultimately declined, however, on the grounds that it excluded most claims related to taxation, a category that included the contested customs duties, according to the tribunal.
Ecuador-US investment treaty guides the tribunal as applicable international law
The Ecuador-US investment treaty would nonetheless inform the Tribunal’s reasoning on the merits of the claims. The arbitration agreement stated that both the laws of Ecuador and the relevant principles of international law would apply to settling disputes, and the Claimants argued that the Treaty formed part of the applicable international law.
While voicing concern that the Claimants were trying to circumvent domestic law by invoking the Treaty, Ecuador also conceded that the Treaty “helps the parties in defining the precise formulation of the principles of international law that the Tribunal may apply.”
The Tribunal concluded that both parties agreed that the principles of Ecuadorian law and international law applied to the claims covered by the arbitration agreement, and, moreover, the applicable international law would include the standards contained in the Treaty. Thus the Tribunal took a two-step approach: first judging the claims in light of the PPAs and Ecuadorian law, and second, determining whether there was a breach of the Treaty.
Damages awarded for breach of the power purchase agreement, no additional damages for breach of the Treaty
The Tribunal concluded that INECEL and Ecuador were in breach of the PPA on several counts, including improperly penalizing Electroquil and failing to abide by the payment schedule stipulated in the PPA. These breaches would amount to monetary damages to Electroquil of just over US$ 5.5 million plus interest.
The tribunal then proceeded to weigh Ecuador’s conduct against the Treaty. Here the tribunal found that Ecuador was in breach of the treaty’s so-called umbrella clause and the Fair and Equitable Treatment clause.
The umbrella clause stated that “each party shall observe any obligation it may have entered into with regard to investments.” While acknowledging that tribunals have taken divergent paths in interpreting such clauses, the Tribunal side-stepped the thornier details of this debate. In this case, the Tribunal concluded that Ecuador clearly had an obligation towards Electroquil’s investment. Given this fact, and the broad wording of the umbrella clause, the Tribunal concluded that Ecuador’s failure to abide by its commitments under the PPAs meant that it had also failed to live up to the Treaty.
In turning to the Fair and Equitable Treatment clause, the Tribunal yoked the standard to the “investor’s justified expectations”. The Tribunal determined that Ecuador’s failure to guarantee payments under the PPA contravened the Claimants’ legitimate expectations, and so therefore also breached of the Fair and Equitable Treatment standard.
Notably, however, neither of these two breaches of the treaty resulted in additional monetary damages. Any damages that resulted from a breach of the umbrella clause were already encompassed in the award granted for the breaches of the arbitration agreement, said the Tribunal. Nor did the Claimants convince the tribunal that the late payments of its invoices—the basis for the breach of the F&E standard—led to any excess damages.
Duke Energy Electroquil Partners and Electroquil SA v Ecuador is available in English and Spanish from the ICSID website, www.icsid.worldbank.org