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The Hague District Court rejects bid to set aside partial award in Chevron v. Ecuador- IA Reporter

Date: Sep 18, 2020

In a judgment dated September 16, 2020, the Hague District Court declined to set aside an August 30, 2018 partial award in the C hevron and Texaco v. Ecuador (2) case.

A s we reported, in this “Second Partial Award on Track II”, an UNCITRAL tribunal of V .V. V eeder (chair), Horacio Grigera Naon and Vaughan Lowe found Ecuador liable for a denial of justice and breach of the umbrella clause under the Ecuador-US bilateral investment treaty.

The tribunal’s conclusions hinged on its finding that a 9.5 billion USD judgment against Chevron by local judge Nicolas Zambrano had been fraudulently obtained by a group of plaintiffs from the Lago Agrio region, in relation to remediation works for which the investors argue they had been released by Ecuador.

As we detail below, the Court found that the tribunal did not fail to state reasons in its decision regarding Ecuador’s exhaustion of local remedies defence. The Dutch judges further found no fault with the tribunal’s orders preventing Ecuador from enforcing the Lago Agrio judgment.

Readers will remember that Ecuador had been similarly unsuccessful in its efforts to set aside prior partial and interim awards on interim measures in this case; notably, in April 2019 the Dutch Supreme Court upheld two earlier awards that had enjoined the state from enforcing the Lago Agrio judgment.

The arbitration is still pending, now with A lbert Jan van den Berg at the helm, as the tribunal is considering Track III of the case, which focuses on the damages owed to Chevron. A hearing is slated for early 2021.

Before the Hague District Court, Ecuador relied on Clifford Chance, and the investors on Linklaters. In the arbitration, the claimants are represented by King & Spalding, Three Crowns, as well as J ames Crawford. Ecuador relies on counsel from Foley Hoag.

Tribunal did not fail state reasons for dismissal of Ecuador’s exhaustion of local remedies defence

In reviewing the legal framework, the District Court noted that it was guided by the February 2020 decision of the Hague Court of Appeal, which had reinstated the three awards in the dispute between Yukos and Russia.

Ecuador first argued that the tribunal had ignored its argument that the investors could not complain of a denial of justice in circumstances when they did not try to challenge Judge Zambrano, or exhaust similar remedies before Ecuador’s Judicial Council.

The Court pointed out, however, that Ecuador had only rarely mentioned these remedies during the proceedings. And, crucially, the tribunal did address Ecuador’s exhaustion of local remedies defence; the arbitrators found that only “reasonably available” remedies were required to be exhausted. Given that the arbitrators eventually held that Chevron had exhausted all such remedies, the Court opined that this implicitly excluded that the remedies cited by Ecuador could have cured the deficiencies in Judge Zambrano’s judgment in a “timely, effective and adequate” manner.

The tribunal also explicitly ruled on Ecuador’s contentions that the investors should have pursued local remedies under the country’s Collusion Prosecution Act, and it found that they did not need to exhaust that remedy. As such, the Court rejected Ecuador’s contention that the tribunal failed to offer reasons on this basis.

Tribunal’s orders with respect to the Lago Agrio judgment do not contravene functus officio principle

Ecuador next submitted that the award should be set aside due to the tribunal’s orders that the respondent “remove the status of enforceability” of the Lago Agrio judgment. The state said that these orders were insufficiently reasoned, impossible to execute, punitive, surprising (given the state’s steadfast position that it could not execute them), and clashed with public policy.

Ecuador further protested the tribunal’s comment that these orders should be executed “to the satisfaction” of the tribunal, as the state argued that this contravened the functus officio status of the tribunal, since it implied that the orders would last beyond the life of the arbitration.

As a preface to the analysis, the District Court recalled that Ecuador had bound itself to respect the award under the BIT and the UNCITRAL Rules, as long as the tribunal did not exceed its powers under these instruments.

On the merits, the judges found that the tribunal had already ruled on similar objections by Ecuador in the Fourth Interim Award (see h ere), and found that the characteristics of Ecuador’s legal order could not excuse the state’s failure to fulfil its obligations under the BIT. In the Track II award, the tribunal further explained why the orders amounted to an adequate form of reparation; for the judges, in these circumstances, Ecuador did not adequately explain why the orders had a punitive character.

Besides, the orders could not come as a surprise, given that they stemmed from the claimants’ prayer for relief, the Court said.

The Court further cited an (unpublished) November 6, 2018 decision on interpretation by the tribunal, which (seemingly) clarified that the tribunal did not prescribe any particular course of action for Ecuador, as long as the state complied with its obligation to prevent the enforceability of the Lago Agrio judgment.

As to Ecuador’s arguments regarding the orders’ temporal validity, the Court noted that the tribunal, as a matter of fact, was not yet functus officio. Rather, it was perfectly possible that the tribunal would gauge Ecuador’s compliance with these orders in the context of the proceedings on Track III.

For these reasons, the Court disagreed that the tribunal went beyond its mandate in making these orders, or that the orders breached public policy.

Tribunal is free to decide on non-quantum issues in Track III

The Court was also unimpressed with Ecuador’s criticism of the tribunal’s statement that the arbitrators could consider “issues of non-compensatory restitution” in the Track III proceedings, whereas a previous procedural order had decided that this track was reserved to quantum issues.

For the judges, this comment was insufficient to conclude that the tribunal went beyond its mandate, especially in a context where the tribunal seemingly left room (in other procedural orders) for other issues to be dealt in Track III.

If Ecuador were concerned that the tribunal may reopen Track II matters in Track III, this was something that could not be judged until the tribunal makes its decision on Track III, the Court lastly pointed out.

Ecuador not meant to be liable for actions by third states

Finally, the Court dismissed Ecuador’s objection that the tribunal’s orders would make it liable if the courts of a third state accepted to enforce the Lago Agrio judgment. (So far, it seems that no third state has agreed to do so, as most jurisdictions concluded that the judgment was fraudulent.)

The District Court held that Ecuador was reading too much into the tribunal’s orders. The judges opined that it was “difficult to imagine” that the tribunal would sanction Ecuador for the acts of third states, as long as Ecuador independently complied with its obligation to remove the enforceability of the Lago Agrio judgment.

The state was ordered to bear the costs of the proceedings.