Republic of Ecuador v Occidental Exploration and Production Company
| Jurisdiction | England & Wales |
| Judge | Sir Anthony Clarke MR |
| Judgment Date | 04 July 2007 |
| Neutral Citation | [2007] EWCA Civ 656 |
| Docket Number | Case No: A3/2006/1116 |
| Court | Court of Appeal (Civil Division) |
| Date | 04 July 2007 |
[2007] EWCA Civ 656
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
Mr Justice Aikens
Sir Anthony Clarke Mr
Lord Justice Buxton and
Lord Justice Toulson
Case No: A3/2006/1116
Mark Cran QC, Simon Birt and Vaughan Lowe (instructed by Weil Gotshal & Manges) for the Appellant/Applicant
Christopher Greenwood QC and Toby Landau (instructed by Debovese & Plimpton LLP) for the Respondent
Hearing dates: 26 & 27 February 2007
This is the judgment of the court.
Introduction
This is an appeal from an order of Aikens J made on 2 March 2006 dismissing an application by the Republic of Ecuador ('Ecuador') under section 67 of the Arbitration Act 1996 ('the 1996 Act') to set aside an award of arbitrators for want of substantive jurisdiction. The appeal is brought with the permission of the judge, whose judgment is reported at [2006] 1 Lloyd's Rep 773. The arbitration was held under the UNCITRAL Rules and the seat of the arbitration was London. The arbitration award was dated 1 July 2004. By their award, the arbitrators held that they had jurisdiction, made various declarations and directed that Ecuador pay the Occidental Exploration and Production Company ('OEPC') US$71,533,649 together with interest amounting to US$3,541,280. As the judge observed, all three arbitrators are well—known and respected public international law specialists, namely the Hon Charles N Brower and Dr Patrick Barrera Sweeney, who were appointed by OEPC and Ecuador respectively, and the chairman, Professor Francisco Orrego Vicuna, who was appointed under article 7 of the UNCITRAL Rules.
The dispute between Ecuador and OEPC which gave rise to the award arose in connection with a Bilateral Investment Treaty ('BIT') between the USA and Ecuador signed on 27 August 1993 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 Amazon basin region of Ecuador.
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 (both made 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 ('the SRI'). When that dispute could not be resolved, OEPC invoked the arbitration procedures set out in the BIT and started an arbitration against Ecuador. OEPC's case was that the actions of the SRI (for which it said Ecuador was responsible) amounted to breaches of Ecuador's obligations under the BIT, which it is common ground is governed by public international law.
Ecuador issued proceedings in the Commercial Court to set aside the award, relying on sections 67 and 68 of the 1996 Act. Ecuador's principal case was (and is) that the arbitrators exceeded their jurisdiction under the BIT. In its turn OEPC challenged the right of Ecuador to question the arbitrators' jurisdiction under section 67. It said that the issue of the arbitrators' jurisdiction was not 'justiciable' before the English courts on the ground that the arbitration arose out of a treaty between states and was on the plane of public international law. On 29 April 2005 Aikens J rejected that challenge and his decision was upheld by this court on 9 September 2005. Those decisions are reported at [2005] 2 Lloyd's Rep 240 and [2006] QB 432 respectively. The interested reader can learn much more about all that in those reports.
So it was that the judge came to hear Ecuador's challenge to the award under section 67. Ecuador also challenged the award under section 68 on the ground that the arbitrators had exceeded their powers in such a way as to constitute a serious procedural irregularity in the arbitral proceedings, which it said had resulted in a substantial injustice to Ecuador. OEPC accepted that the court had jurisdiction to hear and determine that challenge and the judge determined the issues under section 67 and section 68 at the same time. The judge rejected both challenges and upheld the award. There is no appeal from his decision under section 68. We should add that OEPC had a contingent cross-application under section 67 which failed before the judge and in respect of which the judge refused permission to appeal. In these circumstances this appeal arises solely out of the rejection by Aikens J of Ecuador's challenge to the jurisdiction of the arbitrators under section 67 of the 1996 Act.
Ecuador's essential case is that the arbitrators made an award in respect of claims by OEPC that were “matters of taxation” and that by reason of the exclusion clause in 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. In response, the only ground upon which OEPC now says that the arbitrators had jurisdiction is by reason of the exception to that exclusion contained in Article X.2(c).
The BIT
The nature of a BIT treaty is now well known and is described in some detail in the reports of the judgments of both Aikens J and this court on 29 April and 9 September 2005. We do not repeat those descriptions here save so far as is necessary to determine the narrow question in dispute in this appeal. As the judge put it at [8] of his judgment, BITs are effectively treaties that acknowledge the principle of public international law called the 'doctrine of diplomatic protection'. They give investors, here OEPC, protection by giving them 'standing' to pursue a state directly in 'investment disputes' between an investor and a state party to the BIT in ways that are set out in the BIT.
This court has previously held that the BIT confers or creates direct rights in international law in favour of OEPC. As the judge said at [9], those rights come into existence, at the least, at the point when investors pursue claims in one of the ways provided by Article VI of the BIT. The BIT was signed in Washington on 27 August 1993 and came into force on 22 April 1997. It was in the form of the then current prototype US model and was submitted to President Clinton for approval. Both parties relied upon the Letter of Submittal which included the following:
“ Article X (Tax Policies)
The Treaty exhorts both countries to provide fair and equitable treatment to investors with respect to tax policies. However, tax matters are generally excluded from the coverage of the prototype BIT, based on the assumption that tax matters are properly covered in bilateral tax treaties.
The Treaty, and particularly the dispute settlement provisions, do apply to tax matters in three areas, to the extent they are not subject to the dispute settlement provisions of a tax treaty, or, if so subject, have been raised under a tax treaty's dispute settlement procedures and are not resolved in a reasonable period of time.
The three areas where the Treaty could apply to tax matters are expropriation (Article III), transfers (Article IV) and the observance and enforcement of terms of an investment agreement or authorization (Article VI (1) (a) or (b)). These three areas are important for investors, and two of the three—expropriatory taxation and tax provisions contained in an investment agreement or authorization—are not typically addressed in tax treaties.”
In his judgment the judge correctly summarised at [12] the structure of the BIT, as he had done in his earlier judgment, as follows:
“(1) The Preamble sets out the aim of the Treaty, which is to promote greater economic cooperation and investment between the Contracting Parties (ie. the two signatory States), but on a defined and agreed basis.
(2) Article I sets out various definitions. “Investment” is defined broadly and this definition is relevant in the current dispute.
(3) Article II sets out the basis on which each Contracting Party will permit and treat investment. The general principle is that investments of nationals and companies of either Party will receive either “national treatment or most favoured nation treatment” whichever is the better. Article II also provides that the Parties will ensure that investment will have fair and equitable treatment according to international law standards. This Article was central to the arbitration and relevant to the current challenge.
(4) Article III deals with expropriation or nationalisation of investments. Expropriation or nationalisation of investments is not to take place either directly or indirectly except for a public purpose and on defined conditions. Article III is relevant to OEPC's contingent cross – challenge to the arbitration tribunal's apparent conclusion that it did not have jurisdiction to deal with OEPC's allegations of expropriation.
(5) Article IV deals with transfers, particularly of funds, that are related to an investment. The State Parties agree to permit transfers to be made freely and without delay in and out of their territories.
(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...
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