Lago Agrio: Ecuador Pays Arbitral Award

Ecuadoran Flag

Reuters is reporting that Ecuador has paid Chevron the $96 million awarded in a treaty arbitration ($112 million with interest). I’ve written several posts about this award and its aftermath. You may want to review my post on the DC Circuit’s decision affirming confirmation of the award and my post on the Hoge Raad’s decision rejecting Ecuador’s challenge to the award.

Ecuador is to be praised for paying the award and fulfilling its obligation under the US/Ecuador BIT. There was an argument that under Ecuadoran law, the state was required to pay over the award amount to the Lago Agrio plaintiffs instead of to Chevron. Whatever the strength of that argument as a matter of Ecuadoran law, it clearly would have been a breach of Ecuador’s treaty obligations. Ecuador had economic reasons for doing the right thing, namely, a concern to stay in the good graces of the United States Trade Representative.

USS Fort Forth sailing near the Spratley Islands
USS Fort Worth sailing near the Spratley Islands. Credit: US Navy

It’s useful to contrast Ecuador’s attitude here to the attitude of the Chinese government to the recent award in the South China Sea arbitration. Ecuador’s view, like China’s view, was that the dispute that led to the award was not within the jurisdiction of the tribunal. But Ecuador participated in the case, and it recognized the power of the tribunal to decide on its own jurisdiction. Diego Martinez, the head of Ecuador’s central bank, said:

We don’t agree with how these international mechanisms work … however, we are respectful and we fulfill our international obligations.

In contrast, here is an excerpt of the statement of China’s ministry of foreign affairs:

With regard to the award rendered on 12 July 2016 by the Arbitral Tribunal in the South China Sea arbitration established at the unilateral request of the Republic of the Philippines (hereinafter referred to as the “Arbitral Tribunal”), the Ministry of Foreign Affairs of the People’s Republic of China solemnly declares that the award is null and void and has no binding force. China neither accepts nor recognizes it.

* * *

The Chinese government reiterates that, regarding territorial issues and maritime delimitation disputes, China does not accept any means of third party dispute settlement or any solution imposed on China.

This despite what people much more knowledgeable than I have asserted were the serious flaws in China’s legal position.

Perhaps this is just a case of the strong doing what they can and the weak doing what they must. On the other hand, it’s a good day for the international dispute settlement system whenever a state that fought and lost a jurisdictional battle decides to comply with an award.

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.

11 thoughts on “Lago Agrio: Ecuador Pays Arbitral Award

  1. I thought the LAPs had a seizure award attached to Chevron assets in Ecuador. Do you know why they were not able to claim this money?

    1. My best guess is that the Ecuadoran government agreed to satisfy its international obligation even at the risk that the Lago Agrio plaintiffs might then bring a claim against the government.

      1. OK, but surely if Ecuador pay the award then they have met their international obligations. If a third party has a legal attachment, is that really Ecuadors problem?
        I know that the LAP judgement is difficult to enforce outside of Ecuador, but I cannot understand why it should not be enforced inside Ecuador.

        1. As I understand it, the Ecuadoran court ordered the Ecuadoran government to turn over the $96 million dollar debt as well as certain intangibles (trademarks and the like). The trademarks are one thing. I agree with you that under Ecuadoran law it seems that the plaintiffs should be entitled to have them turned over. Maybe they already have been. But money is fungible. So the Ecuadoran government can pay the $96 million, and (it seems to me, though I disclaim any knowledge of Ecuadoran law) the plaintiffs might still have whatever rights they had before against the Ecuadoran government, namely, a right to turnover of the $96 million.

          If you’re saying that Ecuador could meet its international obligation by paying the $96 million to the Lago Agrio plaintiffs, I don’t think I agree, or at least, it’s not that simple. The Lago Agrio judgment may be settled as a matter of Ecuadoran law, but its international legitimacy has not yet been finally determined. The BIT arbitration is ongoing, as is the Canadian enforcement action.

          1. Ok – I had hoped for a better outcome for the LAPs on this one, but I do appreciate your efforts to help me make sense of it.

            1. Fajardo has dedicated his life’s work to this case, and I cannot imagine why on earth he would sign away the embargo on this award. Will we ever get to the truth?

              1. See today’s post. The obvious speculation–either the Ecuadoran government threatened him or it paid him off. I can’t imagine what else it might be, assuming that his clients really didn’t approve the move.

  2. Dear Ted,
    I respect your argument. However, the Ecuador case and the China case are completely different because the Ecuador tribunal had jurisdiction but the the south China sea tribunal does not.

    The doctrine of “competence-competence” does not apply to the China case because China has explicitly reserved on the jurisdiction of territorial disputes when it ratified the UNCLOS.

    Recently the District Court of The Hague set aside a US$50 billion awards against Russia in Yukos cases. Why? Although the tribunal ruled that it had jurisdiction, the court said no because the Energy Charter Treaty did not apply to Russia when the dispute occurred. The doctrine of “competence-competence” does not apply here.

    1. Jeanne, thanks for commenting! Two quick responses:

      1. You note that a Netherlands court vacated the award in the Yukos case on jurisdictional grounds. Julian Ku has noted that there is a potential avenue for China to mount such a jurisdictional challenge to the award in the ICJ (with the Philippines’ consent, of course). But it seems unlikely China will take this course, as it did not participate in the jurisdictional stage of the proceedings in the arbitration itself.

      2. I know of no argument that can show why Article 288(4) of the UNCLOS (“In the event of a dispute as to whether a court or tribunal has jurisdiction, the matter shall be settled by decision of that court or tribunal”) doesn’t show that China is bound by the tribunal’s decision about jurisdiction, even if that decision was substantively wrong.

      I would only add that it’s no fun for a great power to take its lumps in a case like this, as the United States had to do in Nicaragua v. United States. It will be a sign of the maturity of the Chinese legal academy if scholars are willing to criticize the position of their own government, which, it seems to me, is pretty clearly wrong in this instance.

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