Ecuador v Occidental (No 2)

JurisdictionEngland & Wales
Judgment Date04 July 2007
Docket Number([2006] EWHC 345 (Comm))
Date04 July 2007
CourtQueen's Bench Division
England, High Court, Queen's Bench Division.
Court of Appeal.

Aikens J

Sir Anthony Clarke MR; Buxton and Toulson LJJ

Republic of Ecuador
and
Occidental Exploration and Production Company (No 2)1

Economics, trade and finance Bilateral investment treaty Interpretation Object and purpose of treaty to afford protection to investors Uncertainties in interpretation to be resolved in favour of investor Relationship with double taxation treaties

Arbitration Investment arbitration Bilateral investment treaty Proceedings brought by investor Arbitration under UNCITRAL Rules in London Challenge to jurisdiction of arbitration tribunal before English courts Procedural irregularity The law of England

Summary: The facts:Occidental Exploration and Production Company (OEPC), a Californian company, was involved in the production of oil in Ecuador. It brought a claim against Ecuador for alleged violations of the bilateral investment treaty (the BIT) between the United States of America and Ecuador. The claim was heard by an arbitration tribunal operating under the UNCITRAL Rules, with its seat in London. The Tribunal rendered a Final Award on 1 July 2004 (the Award)2 in which it held that it had jurisdiction

and found that Ecuador had breached its obligation to accord OEPC treatment no less favourable than that accorded to nationals or other companies in Article II(1) of the BIT and its obligation concerning fair and equitable treatment in Article II(3)(a) of the BIT. Ecuador was found liable to pay compensation in the amount of some US $75 million plus interest

Ecuador brought proceedings in the English courts challenging the Award under Sections 67 and 68 of the Arbitration Act 1996 (the Act),3 on the ground that the arbitrators had exceeded their jurisdiction. This was the first time that an arbitration award rendered pursuant to a BIT had been brought before the English courts. An application by OEPC seeking to prevent the challenge being heard having been dismissed,4 the courts proceeded to entertain the challenge by Ecuador. Ecuador argued, under Section 67 of the Act, that the arbitration tribunal had exceeded its jurisdiction under the BIT, Article VI, because the substance of the dispute concerned matters of taxation, which it alleged were excluded from the jurisdiction of an Article VI tribunal by the terms of Article X of the BIT.5 Ecuador also argued, under Section 68 of the Act, that there had been serious procedural irregularities in the conduct of the arbitration. OEPC cross-applied that the tribunal had committed a jurisdictional error by holding that the claim for expropriation was inadmissible.

Judgment of the High Court (2 March 2006)

Held:Ecuador's application was dismissed.

(1) The tribunal had had jurisdiction to determine OEPC's claims that Ecuador had breached the provisions of Article II of the BIT. Although the claim had concerned matters of taxation, it fell within Article X(2)(c) of the BIT, because, as the Tribunal had held, the claim concerned the observance and enforcement of terms of an investment agreement. The Court was required to apply the principles in Articles 31 and 32 of the Vienna Convention on the Law of Treaties, 1969, to the interpretation of the BIT, as these provisions of the Vienna Convention reflected customary international law. Applying those principles, matters of taxation fell outside the scope of the BIT unless they touched upon or affected the performance or enforcement of the terms of an investment agreement. The contract between OEPC and Petroecuador6 was an investment agreement and the reference in Article X(2)(c) had to be interpreted as meaning not just express terms but the whole contractual bargain between the contracting parties (paras. 77115).

(2) Ecuador's Section 68 challenge also failed. The remedies granted by the tribunal did not involve an excess of powers so as to involve a substantial injustice. The tribunal had not ruled on the internal validity of Ecuadorian

laws and had not ordered Ecuador to perform its international obligations in any particular way. The tribunal had the power to make orders that were intended to give proper effect to its primary order granting compensation to OEPC (paras. 11629)

(3) It was therefore unnecessary to rule on OEPC's cross-application. Had the Court been obliged to consider it, the cross-application would have been rejected, because the issue of jurisdiction to rule on the expropriation claim had been conceded by Ecuador, so OEPC's cross-application challenging the tribunal's decision on the expropriation claim was in reality an impermissible challenge to the merits of the award (paras. 1307).

Ecuador appealed to the Court of Appeal with regard to the dismissal of its application under Section 67 of the Act.

Judgment of the Court of Appeal (4 July 2007)

Held:The appeal was dismissed.

(1) The correct approach to the interpretation of the BIT was to apply the principles codified in the Vienna Convention on the Law of Treaties. The object and purpose of the BIT was to afford effective protection to investors, an important feature of which was the availability of recourse to international arbitration. It was therefore permissible to resolve uncertainties in the interpretation of provisions of the BIT in favour of the investor (paras. 258).

(2) Article X(2)(c) of the BIT was to be given a broad meaning. The terms of an investment agreement included all of the contractual bargain and the exception in Article X(2)(c) was not confined to cases where the cause of action was for breach of an investment agreement. The question was whether the claim for reimbursement of VAT entailed a departure from that bargain. The submittal letter sent by the President of the United States to the United States Senate in relation to ratification of the BIT supported this interpretation (paras. 2936).

(3) The claim brought by OEPC fell within Article X(2)(c) and the tribunal had not, therefore, exceeded its jurisdiction (paras. 378).

The text of the judgment of the Court of Appeal commences at p. 203. The following is the text of the judgment of the High Court:

JUDGMENT OF THE HIGH COURT
The Story So Far

1. This is the second stage of proceedings in the English courts in which the Republic of Ecuador (Ecuador) challenges an arbitration award dated 1 July 2004. The arbitration was held under the Arbitration Rules of UNCITRAL and the seat of the arbitration was London. The dispute between Ecuador and the Occidental Exploration and Production Co. (OEPC) which gave rise to the arbitration award arose in connection with a Bilateral Investment Treaty between the USA and Ecuador signed on 27 August 1993 (the BIT) and a contract between OEPC, Ecuador and Empresa Estatal Petroleos de Ecuador (Petroecuador), a state-owned corporation of Ecuador, dated 21 May 1999 (the contract). The contract granted OEPC the exclusive right to carry out the exploration and exploitation of hydrocarbons in an area called Block 15 in the Ecuadorian Amazon basin region.1

2. The dispute giving rise to the arbitration was whether OEPC was entitled to obtain refunds of VAT payments that it had made. The VAT payments were on purchases of goods and services made both locally and imported, in connection with the production of oil which was subsequently exported in accordance with the contract. The dispute originally arose between OEPC and Ecuador's Internal Revenue Service.2 But that could not be resolved. So, in 2002, OEPC invoked the arbitration procedures set out in the BIT and started an arbitration against Ecuador. OEPC alleged that the actions of the SRI (for which it said the Republic of Ecuador was responsible) amounted to breaches of Ecuador's obligations under the BIT, i.e., were a breach of Ecuador's treaty and public international law obligations.

3. The award was in OEPC's favour. Ecuador then issued proceedings in the Commercial Court to set aside the award, relying on sections 67 and 68 of the Arbitration Act 1996 (the Act). The principal argument of Ecuador is that the arbitrators had exceeded their jurisdiction, as defined in the terms of the BIT. OEPC challenged the right of Ecuador to question the arbitrators' jurisdiction under section 67 of the Act,3 asserting that the issue of the arbitrators' jurisdiction was not justiciable before the English courts. OEPC said that such a challenge could not be dealt with by the English courts because the arbitration arose out of a treaty between states and was on the plane of public international law.

4. Colman J ordered that the justiciability point should be determined as a preliminary issue. I heard the matter and gave judgment on 29 April 2005. I held that Ecuador's challenge to the award under section 67 of the Act was justiciable. I gave OEPC permission to appeal. The appeal was heard by Lord Phillips of Worth Matravers MR and Clarke and Mance LJJ (as they all then were). The Court of

Appeal handed down judgment on 9 September 2005, dismissing the appeal.4

5. Ecuador's challenge to the award under section 67 of the Act is, in essence, that the arbitrators made an award on claims of OEPC that were matters of taxation and, under the terms of article X of the BIT, such matters fell outside the ambit of the BIT and so could not be the subject of a claim in arbitration under the dispute resolution procedure set out in article VI of the BIT. Alternatively, Ecuador says that the arbitrators exceeded their powers in such a way as to constitute a serious procedural irregularity in the arbitral proceedings, which has resulted in a substantial injustice to Ecuador. Therefore the award can be challenged under section 68 of the Act.

6. OEPC disputes both these allegations. It also has a contingent cross-application, which asserts that the arbitrators wrongly concluded that they lacked jurisdiction to determine a claim of OEPC based on alleged expropriation. OEPC wishes to challenge that...

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