Republic of Ecuador v Occidental Exploration & Production Company [QBD (Comm)]
| Jurisdiction | England & Wales |
| Judge | Mr Justice Aikens,MR JUSTICE AIKENS |
| Judgment Date | 02 March 2006 |
| Neutral Citation | [2006] EWHC 345 (Comm),[2005] EWHC 774 (Comm) |
| Docket Number | Case No: 2004 FOLIO 656,Case No: 04/656 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 02 March 2006 |
[2005] EWHC 774 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
IN THE MATTER OF AN ARBITRATION APPLICATION:
Mr Justice Aikens
Case No: 2004 FOLIO 656
Mark Cran QC, David Lloyd Jones QC and Simon Birt (instructed by Weil, Gotshal and Manges LLP) for the Claimant/Respondent
Christopher Greenwood QC and Toby Landau (instructed by Debevoise and Plimpton LLP) for the Defendant/Applicant
Hearing dates: 1 st, 2 nd and 3 rd March 2005
Judgment Approved by the court
for handing down
(subject to editorial corrections)
A. Summary of the Issue raised by the application of Occidental
This application concerns the English law doctrine of "non—justiciability". The doctrine establishes a general principle that the Municipal courts of England and Wales do not have the competence to adjudicate upon rights arising out of transactions entered into by independent sovereign states between themselves on the plane of international law. The issue arises in the context of an Arbitration Award, dated 1 July 2004, which was made by a Tribunal of three arbitrators following an arbitration between Occidental Exploration and Production Company ("Occidental") and the Republic of Ecuador ("Ecuador"). The arbitration was held under the Arbitration Rules of UNCITRAL and the seat of the arbitration was London. Ecuador then issued an Arbitration Application 1 challenging the Award under section 67(1) of the Arbitration Act 1996, on the ground that the arbitrators had exceeded their jurisdiction. Ecuador invites the court to set aside the Award. 2
Occidental, which is the defendant to that application, says that the doctrine of non—justiciability applies to prevent the English Court from determining that challenge to the Award. This is because Occidental's claim, the arbitration proceedings and the Award all arose out of the terms of a Bilateral Investment Treaty between the USA and Ecuador signed on 27 August 1993 ("the BIT").
Occidental issued an Application Notice dated 24 November 2004 raising the point and seeking an order that the Court dismiss Ecuador's Application on the ground of non – jusiciability. 3 This is the first time that an arbitration award rendered pursuant to a Bilateral Investment Treaty has been brought before the English Courts. I was told that there are well over 2000 current BITs and that the number of arbitrations arising out of them has dramatically increased in recent years.
B. The parties and the factual background to the arbitration
The following factual background is set out for the purposes of the present application. The Defendant is a Californian Corporation and has been engaged in the exploration of oil in the territory of Ecuador since 1985. Under a contract dated 21 May 1999 ("the 1999 Contract") between Occidental and Petroecuador (a state-owned corporation of Ecuador), Occidental obtained the exclusive right to carry out hydrocarbon exploration and exploitation in Block 15 of the Ecuadorian Amazon basin region. In the past Petroecuador had had the exclusive right to exploit oil in Ecuador. Under the 1999 Contract, Occidental became a principal engaged in the exploration and exploitation of Ecuador's oil fields. 4
The scheme of the 1999 Contract is that Occidental assumed virtually all the costs of its exploration and exploitation activities. In return, Occidental received a percentage of the oil produced and it was able to export the oil. 5 Clause 8.1 of the 1999 Contract sets out an elaborate formula which determines the percentage of the oil produced to which Occidental is entitled. It was known as "Factor X".
Occidental made local purchases in Ecuador and imported goods and services from outside Ecuador in connection with the production of oil, which was subsequently exported in accordance with the 1999 Contract. Occidental paid VAT on these purchases and imports. It made regular applications to the Ecuadorian Internal Revenue Service 6 for the refund of VAT payments made after July 1999. 7 At first repayments were made. But on 28 August 2001 the SRI passed Resolution 664, which denied Occidental's claims for reimbursements. Further Resolutions were made by the SRI in 2002 and 2003, denying VAT refunds to Occidental and demanding the repayment to the SRI of refunds that had been made to Occidental from July 1999 to September 2000.
The initial view of the SRI was that the Resolutions denying Occidental the right to VAT refunds were justified on the ground that Factor X was calculated so as to take account of VAT payments. However, it seems that subsequently both the SRI and then Ecuador (in the arbitration) took the view that Occidental had no right to VAT refunds under Article 69A of the ITRL, because VAT refunds were only available to exporters of "manufactured" products and the crude oil exported was not "manufactured".
Occidental filed four law suits in the Tax District Court No 1 of Quito, 8 objecting to the Resolutions that the SRI had passed so as to deny Occidental the right to VAT refunds. The various lawsuits complained that the SRI Resolutions (denying Occidental the right to VAT refunds) were a violation of provisions in Ecuadorian law, in particular Articles 65 and 69A of ITRL. 9 The fact that Occidental pursued these lawsuits in the Tax District Court gave rise to one of the issues on jurisdiction that the Arbitrators had to consider.
Occidental gave up submitting VAT refund applications as a futile exercise.
In 2002 Occidental invoked the arbitration procedures provided for in the BIT and started an arbitration against Ecuador. Occidental 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. In order to see how this fits in with the treaty it is necessary to explain BITs in general and the provisions of this BIT in particular.
C. The Bilateral Investment Treaty
Bilateral Investment Treaties have been developed as a mechanism to encourage investment between states, but using "investors" that are non – governmental organisations. It is a long – standing principle of public international law that states owe duties to other states to protect their citizens. This is known as the "doctrine of international protection". 10 Effectively, BITs are treaties that acknowledge this principle of public international law, apply it to particular circumstances between two states and develop the protection of investors by giving them "standing" to pursue a state directly in "investment disputes" between an investor and a state Party in ways set out in the BIT. 11 The issue at the heart of this application is the nature of those rights and how they fit in with English Municipal law principles, when an investor has invoked its right to pursue an investment dispute through the mechanism of an arbitration which is, as both parties accept, subject to the 1996 Act and principles of English Municipal law.
By the end of 2002 there were 2,181 BITs in force. 12 When the USA – Ecuador Bilateral Investment Treaty was transmitted by the President of the USA to the Senate for its advice and consent to ratification, the Letter of Transmittal stated that the Treaty was designed to protect US investment and to encourage private sector development in Ecuador, as well as to support the economic reforms taking place there. 13
In the "Letter of Submittal" sent to President Clinton by the Secretary of State, submitting to the President the USA/Ecuador Treaty, "the principal BIT objectives" are set out in the letter. These objectives include the principles: (i) that investments of nationals and companies of either Party 14 will receive either "national treatment or most favoured nation treatment", whichever is the better; (ii) that investments are guaranteed freedom from performance requirements; 15 (iii) that expropriation can occur only in accordance with international standards; for a public purpose; in a non – discriminatory manner; under due process of law and upon payment of prompt, adequate and effective compensation. Most importantly for present purposes, (iv) there is the principle that nationals and companies of either Party will have access to binding international arbitration without first resorting to domestic courts in relation to investment disputes.
The scheme of the USA/Ecuador BIT is as follows:
(1) The Preamble sets out the aim of the Treaty, which is to promote greater economic cooperation and investment between the Parties, but on a defined and agreed basis;
(2) Article I sets out various definitions. "Investment" is defined broadly. 16
(3) Article II sets out the basis on which each Party will permit and treat investment, which is in accordance with the principle set out at (i) in the preceding paragraph. It also provides that the Parties will ensure that investment will have fair and equitable treatment according to international law standards.
(4) Article III deals with expropriation or nationalisation of investments.
(5) Article IV deals with transfers, particularly of funds.
(6) By Article V the Parties agree to consult promptly to resolve any disputes in connection with the Treaty.
(7) Article VI deals with the resolution of "investment disputes" between a State Party and a national or company of the other State Party. Its terms are central to this application and I will return to them in the next paragraph.
(8) Article VII concerns the resolution of disputes between the two Parties to the treaty, ie. USA and Ecuador. If necessary, disputes...
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