Doug Cassel on the New Partial Arbitral Award

Chevron advocate, professor of law, and friend-of-Letters-Blogatory Doug Cassel weighs in on the new arbitral award in the Chevron-Ecuador investment treaty arbitration.

In his recent post on the new arbitral award in the Chevron-Ecuador investment treaty arbitration, Ted Folkman wondered, first, whether Chevron “will seek to use the ultimate arbitral award as the basis for an argument against recognition and enforcement of the Ecuadoran judgment.” I can’t speak for the company, but public record sources make it pretty clear that the answer is, “Yes.”

The web site, created by Professor Andrew Newcombe of the law faculty of the University of Victoria in British Columbia, Canada, includes documents from numerous arbitrations. The site has a significant but incomplete set of documents from the Chevron Ecuador arbitration.

It includes the tribunal’s April 9, 2012 procedural order which bifurcated the proceedings. Paragraph 2 of that order defined track 1 to address “preliminary legal issues arising from the Settlement Agreements.” It left track 2 to address “all extant issues which may be required finally to decide the Parties’ dispute.”

Track 1 was largely but not finally resolved by the tribunal’s First Partial Award of September 17, 2013. There the tribunal determined that Chevron was entitled to enforce the 1995 settlement agreement and the 1998 “final release” granted by the government of Ecuador to Texaco. The tribunal further ruled that the release covered, not only contractual claims, but all legal claims by the government, including claims of “diffuse” or collective environmental harm. Finally, the tribunal decided that, because only the government was entitled under Ecuadoran law as it stood in 1995 and 1998 to bring such claims, the government had the capacity to, and did, release all such diffuse or collective environmental claims, regardless of who might later try to assert them.

In so ruling, the tribunal confirmed the view—not disputed by either party—that the release did not cover individual claims for personal environmental harm. The tribunal deferred to track 2—the oral hearing on which is scheduled for January 2014—the issue of whether the Lago Agrio lawsuit included any such individual claims, or was instead a collective claim for diffuse harm. The tribunal also deferred certain ancillary issues relating to the releases.

So the track 1 partial award narrowed the issues, but still did not finally resolve the legal effect of the 1995 settlement and the 1998 release. Specifically, the award did not decide whether the claims by the Lago Agrio plaintiffs are “diffuse,” so that they have already been settled and are thus barred, or “individual,” in which case they were not settled and could be pursued in the Lago Agrio litigation.

When the tribunal does reach the issue of collective vs. individual claims, however, the prospects for Ecuador do not look encouraging. The Lago Agrio judgment recites the plaintiffs’ express claim that, based on their “collectively recognized” rights, they seek what amount to collective—not individual—remedies, such as cleaning up alleged oil contamination. They also ask that Chevron be ordered to pay money—not to any individuals, in individualized amounts—but to the Amazon Defense Front, to be used “exclusively for the ends determined” in the judgment, namely environmental clean-up and health programs—quintessentially collective relief.

Track 2 will also deal with all other “extant issues.” They may include at least those issues raised by Chevron prior to the bifurcation order. Those issues are plainly relevant to any future recognition or enforcement of the Lago Agrio judgment. Chevron’s September 6, 2010 memorial on the merits (accessible on the italaw web site) argued, among other points, that the Lago Agrio litigation was “permeated with fraud,” the Ecuadorian government colluded with plaintiffs to improperly influence the court, the court “succumbed to corruption,” the Ecuadorian judiciary lacks independence, and Ecuador denied due process to Chevron.

Chevron’s March 20, 2012 supplemental memorial (also on italaw) added arguments (among others) that the Lago Agrio judgment was “fraudulent,” that Ecuador is incapable of providing Chevron an “impartial” tribunal, and that the Lago Agrio litigation amounts to a “denial of justice.”

So if Chevron wins on some or all of these issues before the tribunal, the company will have plenty of ammunition to oppose recognition and enforcement of the Lago Agrio judgment. Lest there be any doubt as to its intentions, the track 1 award notes that, among other relief, Chevron asks the tribunal to “[d]eclare that enforcement of the Lago Agrio Judgment within or without Ecuador would be inconsistent with Ecuador’s obligations under the Settlement Agreements, the BIT and international law.”

Ted also asked “why the tribunal was not required to give issue-preclusive effect to the Ecuadoran judgment,” in light of Texaco’s agreement to accept Ecuadoran jurisdiction. The short answer is that while the legal effect of Texaco’s agreement has been argued by the parties before the arbitral tribunal, the issue has not yet been decided by the tribunal. So it, too, may possibly be ruled on in track 2.

Wholly aside from the New York UFMJRA statutory exceptions to recognition of a judgment based on fraud, denial of due process or lack of an independent court, Chevron argues that Texaco agreed to accept Ecuadoran jurisdiction only over the same claims as in the Aguinda litigation, namely individual damage claims (albeit presented in a class action). Texaco did not, Chevron argues, agree to accept Ecuadoran jurisdiction over “diffuse” or collective claims of environmental damage, which the government of Ecuador asserted in the Aguinda litigation were solely its rights to assert, and not those of the private plaintiffs. In contrast, Ecuador now argues that the Aguinda and Lago Agrio litigations are essentially the same.

It could be, then, that in deciding on whether the Lago Agrio lawsuit includes individual claims, for purposes of deciding whether it was barred by the 1998 release, the tribunal may consider the same issue in order to pass on the legal effect of Texaco’s acceptance of Ecuadoran jurisdiction. But there is no guarantee that it will. As noted above, track 2 will address only those issues which, in the judgment of the tribunal, are “required” in order to decide the dispute between Chevron and Ecuador.

I have never taken a position on the legal effect of the release; my focus as a human rights advocate has been on the gross violations of due process in the Lago Agrio litigation. But reading the arbitral tribunal’s recent decision in light of the assertedly “collective” rights recognized in the Lago Agrio judgment, it appears that Chevron has good reason to celebrate the tribunal’s unanimous decision.

8 responses to “Doug Cassel on the New Partial Arbitral Award”

  1. Doug, thanks for these useful comments. I agree with you about the likely outcome when the tribunal ultimately decides whether the LAPs’ claims were collective or individual.

    I do not think, though, that I agree with your take on the issue preclusion issue. Even given the way the tribunal divided the issues into two tracks, it seems to me the tribunal should have considered whether it was required to follow the Ecuadoran court’s view of Ecuadoran law before it decided the question of Ecuadoran law. I don’t think that given its decision, the tribunal can really say in track 2 that the LAP claims, even if collective, were not barred by Ecuadoran law after all. Maybe this is just a way of saying that the tribunal’s division of the issues into two tracks turned out not to be sensible.

    1. L. Conrad

      Would Chevron not be able to argue at least “denial of justice” against the ROE with respect to preclusion claims. See Professor Alford’s recent article in the Virginia Journal of International Law.

      1. L. Conrad, that’s what I suggested in the prior post. But shouldn’t that necessarily have come before a decision about the Ecuadoran law question? I guess that’s my point.

    2. Doug Cassel

      Dear Ted,

      Normally I would agree that a tribunal should decide the issue of preclusion before it decides the issue that may be precluded. In this case, however, even before the Lago Agrio court issued its judgment in February 2011, the arbitral tribunal had already concluded that Chevron’s case on the merits—including Chevron’s evidence of pervasive fraud in the Lago Agrio proceedings—was strong enough to warrant the issuance of interim measures ordering Ecuador not to enforce any judgment that might result from the Lago Agrio proceedings. In that circumstance, it would have been incongruous for the tribunal to rule itself precluded by a judgment tainted by substantial evidence of fraud, on which the tribunal expected eventually to rule.

      Perhaps you are suggesting that the tribunal should have rendered a final award on the fraud issues before, or simultaneously with, its ruling on the legal effect of the Texaco settlement. That would make logical sense; if the tribunal indeed ruled that there was pervasive fraud, there would have been no need to treat seriously any issue of preclusion by a fraudulent judgment.

      I don’t know why the tribunal chose instead to address the settlement issue first, before ruling on the fraud. But I can think of at least two possible reasons. One is efficiency: the legal effect of the settlement is mainly a legal issue, which the tribunal could have expected to take the tribunal far less time to resolve than would Chevron’s multiple, fact-specific allegations of pervasive fraud in the Ecuadorian proceedings. If the settlement issue were finally resolved in track 1, it might have been dispositive of the case, perhaps obviating the need to reach the fraud issues in track 2.

      A second possible reason is comity. The tribunal may have been understandably reluctant to reach the merits of the fraud issues, which would require it to pass judgment on the allegedly unsavory conduct of the Ecuadorian courts. The tribunal may have preferred to try to dispose of the case on the legal issue of the effect of the settlement, which would not require the tribunal to make any evaluative statements about either the Lago Agrio court or the Ecuadorian judicial system generally. All sides might have been spared embarrassment.

      In any case, the arbitration is now headed for a track 2 ruling. If, as seems likely, the tribunal now reaches the fraud issues, its ruling is likely to demonstrate why preclusion would not have been appropriate, because no issue should be precluded by a fraudulent judgment —Doug

      1. Thanks, Doug, for the observations.

        What is the basis for the assertion that “the arbitral tribunal had already concluded that Chevron’s case on the merits—including Chevron’s evidence of pervasive fraud in the Lago Agrio proceedings—was strong enough to warrant the issuance of interim measures” by February 2011? Neither of the two orders on interim measures that I have seen (the orders of 5/14/10 and 2/9/11) address the tribunal’s view of the merits of the case. It may be that there is some other explanation of the decision that I have not seen, or that you are saying that the tribunal, by necessary implication, made a decision about Chevron’s likelihood of success on the merits of its denial of justice claim—I am not sure.

        1. Doug Cassel

          Dear Ted,

          In a series of interim orders and awards, the tribunal implicitly concluded, initially, that there was a “reasonable possibility” that Chevron would prevail on its fraud claims, and, eventually, that Chevron had made out a “serious” and “prima facie” case of fraud. The sequence is as follows:

          Chevron had pleaded fraud, both in its April 2010 requests for interim measures, and in its September 2010 memorial on the merits. In the February 9, 2011 order of interim measures, with respect to “the grounds” for Chevron’s application, “the Tribunal conclude[d] that the Claimants [Chevron and Texaco] have made out a sufficient case, …, under Article 26 of the UNCITRAL Rules, for the order … to take interim measures …” The standard of UNCITRAL Rule 26.3(b) requires parties seeking interim relief to satisfy the tribunal, inter alia, that there is a “reasonable possibility” that they will succeed on the merits. The tribunal thus implicitly found a “reasonable possibility” that Chevron would prevail on “the grounds” of its application, which included the fraud claims.

          The tribunal’s First Interim Award, dated January 25, 2012, was more explicit. In re-issuing its earlier “order” for interim measures, now as an “interim award,” it quoted Chevron’s January 12, 2012 request for a declaration that Claimants had made out a prima facie case on the merits, including on their claim that the Lago Agrio litigation “has been tainted by fraud and/or serious due process violations.”

          The tribunal’s Second Interim Award of February 16, 2012 again ordered Ecuador to suspend recognition and enforcement of the Lago Agrio judgment. It “determine[d] further that the Claimants have established, for the purpose of their said applications for interim measures, (i) a sufficient case as regards both this Tribunal’s jurisdiction to decide the merits … and the Claimants’ case on the merits …”

          Finally, eleven days later, in its Third Interim Award, finding that it had jurisdiction (pars. 4.57 and 4.58), the tribunal explicitly found a “serious” and “prima facie” case of fraud. Referring to the fraud claims as set forth in the oral argument, the tribunal commented:

          “There is no doubt in the Tribunal’s mind that the allegations … rank amongst the gravest accusations which can be advanced by a claimant against a modern State subject to the rule of law. There is equally no doubt that these allegations are deeply offensive and repellent to the Respondent. … ”

          “The Claimants’ allegations may be completely false or completely true. As yet, the Tribunal has formed no concluded view on any of these contested allegations one way or the other. Its decision in this Award is limited to the required application of the prima facie standard … to the Respondent’s jurisdictional objections; and for this limited purpose it has concluded that the Claimants’ pleaded case is serious and not advanced in bad faith; nor is its case incredible, frivolous or vexatious.”

          That remains the tribunal’s stated position on the fraud claims, pending its ruling on the track 2 issues.

          1. Thanks, Doug. That is a helpful summary. My question was perhaps too narrow, as I asked why you had asserted that the tribunal had reached those conclusions before the Lago Agrio judgment, but I think it’s fair to assume that the tribunal’s later orders or awards, which you reference, reflect its thinking at the time of the earlier orders.

  2. I think you also make an interesting point about Chevron’s likely response to the argument that the Aguinda stipulations would prevent it from seeking to use the outcome of the arbitration to challenge the entitlement of the Lago Agrio judgment to recognition and enforcement. I have an open mind about this, and obviously we have seen no briefs about the issue yet. But it strikes me that there could be issues here: (1) in a US class action, even if the theory is that each class member is harmed individually, the line between individual and collective claims is not always clear (e.g., in the cy près context); (2) it seems natural to expect that a claim will be pleaded differently in country 2 after a forum non conveniens dismissal in country 1; and (3) in any case, suppose the LAPs had pleaded purely individual claims in Ecuador and then moved for leave to amend to add collective claims (as I suppose they could have done in New York had the case proceeded there)–were the LAPs really required to litigate the whole case in Ecuador without any amendments? But those are just informal first impressions.

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