Substantial compensation award against Ecuador upheld by Supreme Court

bureau Brandeis successfully defended Chevron Corporation (USA) and Texaco Petroleum Company (USA) in proceedings initiated by the Republic of Ecuador before the Dutch courts to overturn arbitral awards rendered under a Bilateral Investment Treaty between the United States of America and Ecuador.

On 26 September 2014, the Supreme Court upheld a substantial compensation award payable by Ecuador to Chevron and Texpet.

The proceedings concerned a conflict over a concession agreement between Ecuador and Texpet. In 1964 Ecuador granted Texpet a concession for oil extraction and exploitation in the Amazon territory, which expired on 6 June 1992. In the early 1990s Texpet lodged seven court cases in Ecuador, based on alleged breaches of the concession agreement by Ecuador.

In 1997 a Bilateral Investment Treaty entered into force between Ecuador and the United States, aimed at promoting economic cooperation between them. The treaty included provisions to protect investments by legal entities from one treaty state in the other treaty state. A legal entity from one treaty state that was not satisfied that it had been afforded proper protection in the other treaty state could invoke the arbitration clause to submit the dispute to an arbitral tribunal.

Chevron and Texpet initiated arbitration proceedings against Ecuador under the BIT, arguing that the Ecuadorian courts had failed to rule on its claims over a period of nearly ten years and that those claims must be deemed ‘investments’ within the meaning of the BIT. One of Ecuador’s arguments was that such claims could not be regarded as investments and that the arbiters were therefore not competent to rule on the dispute.

The arbiters accepted jurisdiction and, in arbitration proceeding conducted in The Hague, ordered Ecuador to pay a substantial sum in compensation. Ecuador then lodged proceedings in the Dutch courts, seeking to have the arbitral decision overturned. The district court dismissed Ecuador’s claim and the Court of Appeal upheld that judgment.

The Supreme Court dismissed the appeal in cassation, while Advocate General Jaap Spier had advised the Supreme Court to overturn the Court of Appeal’s decision. The Supreme Court ruled in particular that although the arbitration may have impinged on Ecuador’s national sovereignty to a certain extent, this was a consequence of the treaty (i.e. the BIT) that it had chosen to conclude with the US and the remarkably wide definition of the concept of investment contained in it, a definition that deviates from the term’s common usage. The Court of Appeal was free to decide that the legal claims lodged by Texpet that were pending when the BIT entered into force in 1997 must be regarded as ‘investments’ in the particular sense accorded to that term by the treaty states, even though this term is not usually taken to encompass such claims.

The full text of the decision (13/04679; in Dutch only) can be found at www.hogeraad.nl, ECLI:NL:HR:2014:2837.

For more information, please contact Jozua van der Beek or Louis Berger.