Another Front In the Lago Agrio Case

For the second time in a week, one of my posts has been overtaken by events: Investment Arbitration Reporter (subscription required) has reported that the tribunal canceled an upcoming hearing in a way that made it pretty clear that it had decided the merits of the jurisdictional issue in favor of the United States. I’ll have more on this when I can.

At EJIL:Talk!, Dapo Akande has written about a piece of the Lago Agrio case that hasn’t been on my radar screen until now: the BIT arbitration Ecuador initiated against the United States in 2011. Because this proceeding is between the two state parties to the BIT rather than between a state and an investor, it’s pretty unusual. Akande writes that he knows of only one other inter-state BIT arbitration.

Here is the story. Chevron had initiated a BIT arbitration against Ecuador in 2006, claiming that Ecuador was liable to it for damages on account of a breach of Article II(7) of the bilateral investment treaty between the United States and Ecuador, which provides:

Each Party shall provide effective means of asserting claims and enforcing rights with respect to investment, investment agreements, and investment authorizations.

The claim was that Chevron had suffered damages on account of undue delay in the settlement of lawsuits TexPet (of which Chevron was a shareholder) had brought against Ecuador in the early 1990s.

In March 2010, a BIT tribunal issued a partial award to Chevron construing Article II(7) of the BIT. That award led ultimately to a 2011 award of $96 million in damages in favor of Chevron. I have previously noted the 2011 award and Ecuador’s unsuccessful attempts to vacate it in the District Court of the Hague.

Ecuador objected to the tribunal’s 2010 interpretation of Article II(7), and in June 2010, by diplomatic note, Ecuador’s Minister of Foreign Affairs, Trade and Integration informed the Secretary of State of its objections. In particular, in Ecuador’s view the parties had agreed to provide an “effective framework or system” for the resolution of claims, but had not agreed “to assure that the framework or system provided is effective in particular cases.” Thus there could be no claim under Article II(7), in Ecuador’s view, that a party’s courts had simply “gotten it wrong.”

The Minister asked the United States “to confirm, by note of reply,” that it agreed with Ecuador’s interpretation. And he stated that “[i]f such a confirming note is not forthcoming or otherwise the Illustrious Government of the United States does not agree with the interpretation of Article II.7 of the Treaty by the Government of the Republic of Ecuador, an unresolved dispute must be considered to exist” between the two states “concerning the interpretation and application of the Treaty.” This was a clear reference to Article VII, which provides:

Any dispute between the Parties concerning the interpretation or application of the Treaty which is not resolved through consultations or other diplomatic channels, shall be submitted, upon the request of either Party, to an arbitral tribunal for binding arbitration in accordance with the applicable rules of international law.

The United States responded by diplomatic note. The Assistant Secretary of State for Western Hemisphere Affairs wrote that “the U.S. government is currently reviewing the views expressed in your letter and considering the concerns that you have raised,” and that it “look[ed] forward to remaining in contact” on the matter. But although the US never took a position for or against Ecuador’s interpretation of Article II(7), Ecuador demanded arbitration of what it characterized as the dispute. Akande’s observation seems right on the money:

[A]s the case arises out of Ecuador’s dissatisfaction with the interpretation given by an earlier investor-State arbitral tribunal … to a particular provision of the Ecuador—US BIT, the case may be construed as a way by which Ecuador is trying to use the inter-State procedure as a way of appealing the results of a case brought under the investor-State procedure. There have been concerns by many that there is no appellate procedure in the investment treaty system and this case seems to be an attempt to create one.

The parties have filed memorials and counter-memorials addressed to the tribunal’s jurisdiction. The dueling expert reports are collected at the Permanent Court of Arbitration’s website.

I don’t have anything really to add to Akande’s analysis of the issue. First, it’s not clear that the US refusal to say whether it agreed or disagreed with Ecuador’s interpretation of Article II(7) means that there is a dispute about its interpretation. Second, Ecuador is not claiming that the US has violated the BIT in any way, so the dispute, if there is one, seems highly abstract, and it concerns only interpretation, not application. Akande points to the ICJ’s advisory opinion on the legality of Congressional attempts to force the closure of the PLO’s mission to the UN, where the President agreed that closure of the mission would violate the US’s obligations under the US-UN Headquarters Agreement but where the closure had not occurred. The ICJ rejected the US view that it could not be required to arbitrate with the UN, on the grounds that while there was no dispute about the interpretation of the treaty there was a dispute about its application. In Ecuador’s case, on the other hand, the question, as Akande puts it, is whether the absence of any dispute about application means that there is no dispute about interpretation.

As in other instances in the Lago Agrio saga, there’s a pleasing symmetry here. Ecuador’s basic complaint was that the Article II(7) of the BIT should not be an avenue for investors to appeal from merely erroneous decisions of the national courts. So what does Ecuador do? Attempt to use Article VII as an avenue for states to appeal from erroneous decisions of the BIT tribunal.

About Ted Folkman

Ted Folkman is a shareholder with Murphy & King, a Boston law firm, where he has a complex business litigation practice. He is the author of International Judicial Assistance (MCLE 2d ed. 2016), a nuts-and-bolts guide to international judicial assistance issues, and of the chapter on service of process in the ABA's forthcoming treatise on International Aspects of US Litigation, and he is the publisher of Letters Blogatory, the Web's first blog devoted to international judicial assistance, which the ABA recognized as one of the best 100 legal blogs in 2012, 2014, and 2015.

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