Data

Date:: 30-03-2010
Country:: Arbitral Award
Number:: IIC 421 (2010)
Court:: Ad hoc Arbitration, The Hague
Parties:: Chevron Corporation &Texaco Petroleum Corporation v. Ecuador

Keywords

STATE CONTRACTS - LONG-TERM CONTRACTS - EXPLORATION AND EXPLOITATION AGREEMENT - BETWEEN TWO UNITED STATES COMPANIES AND THE ECUADORIAN GOVERNMENT – REFERENCE TO UNIDROIT PRINCIPLES TO INTERPRET APPLICABLE LAW (INTERNATIONAL LAW AS WELL AS ECUADORIAN LAW)

LOSS OF A CHANCE – CRITERION FOR DETERMINING AMOUNT OF DAMAGES IN CASE OF BREACH OF THE BIT DUE TO DENIAL OF JUSTICE – REFERENCE BY ONE OF THE PARTIES TO ARTICLE 7.4.3(2) OF UNIDROIT PRINCIPLES – ACCORDING TO ARBITRAL TRIBUNAL ONLY ADMISSIBLE WHERE AMOUNT OF LOSS NOT DETERMINABLE – REFERENCE TO COMMENT 2 TO ARTICLE 7.4.3 OF UNIDROIT PRINCIPLES

FORCE MAJEURE – HARDSHIP – DISTRIBUTION BETWEEN THE PARTIES IN A JUST AND EQUITABLE MANNER OF THE LOSSES AND GAINS RESULTING FROM UNFORESEEABLE EVENT – REFERENCE TO UNIDROIT PRINCIPLES (COMMENT ARTICLES 7.1.7 AND TO ARTICLES 6.2.2 – 6.2.3(2)) AND TO PRINCIPLES OF EUROPEAN CONTRACT LAW (ARTICLE 6:111(3)(B)) AS A MEANS TO INTERPRET ECUADORIAN LAW (ARTICLE 1563 ECUADORIAN CIVIL CODE)

Abstract

Between the mid ’60s and the mid ‘70s Claimants, two United States oil companies, and Respondent, the Government of Ecuador, entered in into a series of agreements (the “Agreements”) whereby the latter granted the former permission to explore and exploit, through a local subsidiary, oil reserves in Ecuador’s Amazon region, and Claimants committed themselves to provide a percentage of their crude oil production to Respondent to help meet Ecuadorian domestic consumption needs. The Agreements also provided that Respondent was entitled to set the domestic price at which it would purchase Claimants’ required contributions, but once Claimants had satisfied their obligation to contribute oil for domestic consumption, they were free to export the remainder of their oil at the substantially higher international market price, and if oil was used for purposes other than to satisfy Ecuadorian domestic consumption needs, Claimants were entitled to receive compensation at the international market price. In the course of performance of the Agreements the parties argued about a number of alleged breaches of their obligations, eventually prompting Claimants in the early ‘90s to file seven law suits against Respondent in Ecuadorian courts claiming a total of over US$ 500 million in damages. Since some 15 years later six of these cases were still pending at first instance while the seventh had been dismissed, in 2006 Claimants commenced arbitration proceedings in accordance with the Bilateral Investment Treaty ("the BIT") that had in the meantime been entered into by the United States and Ecuador, accusing Respondent of denial of justice on the ground of undue delay or manifestly unjust decisions, and claiming damages for the loss suffered as a result thereof.

As to the applicable procedural rules, the Arbitral Tribunal noted that the BIT referred to the UNCITRAL Arbitration Rules and decided that, since The Hague was the place of arbitration, any mandatory provisions of Dutch arbitration law would also be applicable. Concerning the law governing the substance of the dispute, the Tribunal decided to apply the substantive provisions of the BIT and any relevant provisions of other sources of international law.

As to the merits of the case, the Tribunal found that Respondent had breached its obligation under Article II(7) of the BIT through the undue delay of the Ecuadorian courts in deciding Claimants’ cases, and was therefore liable to pay damages to the Claimants for the loss resulting thereof.

Also with respect to the amount of damages the Tribunal basically decided in favour of Claimants. Claimants argued that they were entitled to damages equivalent to the total amount of damages sought in their cases before the Ecuadorian courts plus the damages incurred as a result of the delay. Respondent objected that the Tribunal should award damages, if any, only to the amount corresponding to the likelihood of success that Claimants had with respect to the merits of their Ecuadorian court cases, i.e. 15% of the total amount claimed by Claimants, and in support of its argument Respondent invoked the “loss of a chance” principle which, as it pointed out, not only is endorsed by a number of legal systems but also is “enshrined in transnational sources such as Article 7.4.3(2) of the UNIDROIT Principles of Commercial Contracts, often applied by ICC tribunals”. In rejecting Respondent’s argument the Arbitral Tribunal stated that the “loss of chance” principle is not so widely accepted across legal systems as to be considered a “general principle of law recognized by civilized nations”. In its opinion at most it can be said that the principle is applied in exceptional situations where there exists a “harm whose existence cannot be disputed but which it is difficult to quantify” as stated in the Comments to Article 7.4.3(2) of the UNIDROIT Principles. However, in the case at hand there were no such difficulties in quantifying the Claimants’ loss caused by the undue delay of the Ecuadorian courts in deciding their cases, and therefore the Tribunal decided not to apply the “loss of chance” principle but to determine the amount of damages after having evaluated the merits of each of Claimant’s cases and decided upon them as it believes an honest, independent and impartial Ecuadorian court should have.

One of the Claimants’ cases pending before an Ecuadorian court concerned the effects of an earthquake, which caused a temporary reduction of Claimants’ production of oil, on Claimants’ obligation under the Agreement to contribute to Respondent’s domestic consumption. According to Claimants their obligation was proportionate to and contingent on their own production of oil, with the consequence that when due to the earthquake they were temporarily unable to produce the usual amount of oil, also their obligation to contribute to domestic consumption was concomitantly reduced in proportion to their production. On the contrary, according to Respondent as soon as Claimants resumed full production they were bound to make an additional contribution as compensation for their reduced contribution during the force majeure period, and in support of its argument Respondent referred to Article 1590 (currently 1563) of the Ecuadorian Civil Code, pointing out that under Ecuadorian law the doctrine of force majeure releases a debtor from liability due to delay in performing the contractual obligation, but does not eliminate the obligation itself. In deciding in favour of Claimants, the Tribunal not only recalled a clause in the Agreement which stated that Claimants’ contribution was to be calculated as a proportion of its total quarterly production thereby excluding any further obligation to contribute beyond the maximum production in a given quarter, but pointed out that in general “the doctrine of force majeure, like the doctrine of hardship and other related concepts, is designed to distribute between the parties in a just and equitable manner the losses and gains resulting from an unforeseeable event”, referring to Comment 3 to Article 7.1.7 and to Articles 6.2.2 and 6.2.3(3)(b) of the UNIDROIT Principles, as well as to Article 6:111(3)(b) of the Principles of European Contract Law.

Fulltext

Ad hoc arbitration
Arbitrators: Professor Karl-Heinz Böckstiegel (President); The Honorable Charles N Brower (Claimant appointment); Professor Albert Jan van den Berg (Respondent appointment)
Procedural Stage: Partial Award on Merits
[…]
C.II . The Merits Phase
1 . The Issues on the Merits
26 . The issues raised by the Parties in this merits phase center around six principal subjects.
27 . The first set of issues concerns whether the Respondent has committed a denial of justice under customary international law either on the basis of undue delay or manifestly unjust decisions (see Sections H.II.1 and H.II.2 below).
28 . The second set of issues concerns whether the Respondent has violated specific BIT standards through its conduct or inaction in relation to the Claimants’ court cases (see Section H.II.3 below).
29 . The third set of issues concerns whether the Respondent has breached obligations under the BIT with respect to “investment agreements” as that term is understood in the BIT (see Section H.II.4 below).
30 . The fourth set of issues concerns whether the Claimants must exhaust local remedies in order to fulfill the requirements of their claims for denial of justice and other BIT violations and, if so, whether they have in fact exhausted all required local remedies (see Section H.III below).
31 . The fifth set of issues concerns the preclusive effect, if any, that the Claimants’ statements or conduct prior to the commencement of arbitration should have on their ability to pursue the present claim (see Section H.IV below).
32 . The last set of issues concerns the damages consequent upon a finding of denial of justice or breach of the BIT. The Parties dispute the proper definition of Claimants’ loss, whether the Claimants should have prevailed in the underlying court cases in the Ecuadorian courts, and the quantum of damages to be awarded as a result of any breach that may have prevented the Claimants from recovering on meritorious claims (see Sections H.V, H.VI, and H.VII below).
[…]
G . Factual Background
124 . Subject to more detail in later sections regarding particular issues, the following is a summary of the facts leading up to the present arbitration.
125 . In 1964, the Ecuadorian Government granted oil exploration and production rights in Ecuador’s Amazon region to TexPet through a concession contract with TexPet’s local subsidiary. With Government consent, TexPet assigned half of its ownership interest in the concession to Gulf, forming the Consortium. TexPet served as operator of the Consortium’s activities.
126 . In September 1971, Ecuador formed a governmental entity, CEPE, which was replaced in 1989 by a successor State-owned oil company, PetroEcuador.
127 . On August 6, 1973, TexPet and Gulf entered into a new concession contract, i.e., the 1973 Agreement, Exh. R-570, with Ecuador and CEPE. This new agreement replaced the 1964 concession contract. Pursuant to the 1973 Agreement, CEPE exercised an option to acquire a 25% ownership interest in the Consortium. Later, it also purchased Gulf’s interest, thereby providing it with a 62.5% interest in the Consortium. TexPet owned the remaining 37.5% interest. However, TexPet continued to function as operator of the Consortium.
128 . The 1973 Agreement permitted TexPet to explore and exploit oil reserves in Ecuador’s Amazon region, but it required TexPet to provide a percentage of its crude oil production to the Government to help meet Ecuadorian domestic consumption needs. The Republic was entitled to set the domestic price at which it would purchase TexPet’s required contributions. Once it satisfied its obligation to contribute oil for domestic consumption, TexPet was free to export the remainder of its oil at prevailing international market prices, which were substantially higher than the domestic price. If oil was used for purposes other than to satisfy Ecuadorian domestic consumption needs, then TexPet was entitled to receive compensation at the international market price.
[…]
H.I . Preliminary Considerations
1 . Applicable Law
158 . The procedural law to be applied by the Tribunal consists of the procedural provisions of the BIT (particularly its Article VI), the UNCITRAL Arbitration Rules and, since The Hague is the place of arbitration, any mandatory provisions of Dutch arbitration law.
159 . The substantive law to be applied by the Tribunal consists of the substantive provisions of the BIT and any relevant provisions of other sources of international law. The Tribunal notes that the VCLT, while being treaty law, has not been ratified by the United States. Therefore, both it and the ILC Draft Articles may only apply in the present case insofar as they reflect customary international law. However, neither Party has disputed the relevant provisions of the VCLT and ILC Draft Articles as authoritative statements of customary international law. Indeed, both Parties have relied on them in these proceedings. In addition to the above sources, the national law of Ecuador may be relevant with regard to certain issues.
[…]
4 . Breach of the Investment Agreements
[…]
5 . The Tribunal
241 . The Tribunal recalls the text of Article II(7) of the BIT:
“Each Party shall provide effective means of asserting claims and enforcing rights with respect to investment, investment agreements, and investment authorizations. […]”
[…]
269 . In the present case, the Tribunal is persuaded that the Claimants have indeed adequately utilized the means available to assert claims in a manner that attracts the protection of Article II(7) of the BIT. The Tribunal is not convinced that any further actions on the part of the Claimants were required to trigger the application of Article II(7) or would have made any of their seven cases proceed more rapidly. As further explained later in this award (see Section H.III below), the Respondent has not demonstrated that its proposed remedies of oral and written closing arguments or disciplinary or monetary sanctions could have been effective in reducing delay. The Claimants were also not required to bring actions for the recusal of judges in the seven cases. Judges changed regularly in the Claimants’ court cases even without recusal and therefore recusals would also not have had any effect.
270 . Taking into account the totality of the circumstances that the Tribunal deems relevant, the Tribunal ultimately concludes that a breach of Article II(7) of the BIT was completed by reason of undue delay at the date of the Claimants’ Notice of Arbitration, December 21, 2006. At that time, the Claimants’ cases had been pending in the Ecuadorian courts for 13 to 15 years. Six of these cases had never seen any decision. The last of the cases, Case 8-92, had recently been dismissed for abandonment, but that decision would soon be overturned and leave the case again pending at first instance. At that time, the political turmoil of 2004–2005 had passed and a re-constituted Supreme Court had been in place for over a year since November 2005. More than four years had also passed since the close of the Aguinda litigation. As such, the Tribunal concludes that this date constitutes the critical date upon which the breach of Article II(7) was completed.
271 . Pursuant to the finding of a breach of Article II(7) of the BIT as of the date of the Notice of Arbitration, the Tribunal must proceed to consider the questions of causation between the breach by Ecuador and the alleged damages to the Claimants in each of the seven cases as well as the quantum of any damages. This will be done later in this Award.
[…]
H.V. The Claimants’ Loss — Measure of Damages
1 . Arguments by the Claimants
355 . According to the “but-for” damage principle, the Claimants submit that they should be awarded damages equivalent to that sought in their cases before the Ecuadorian courts, as well as the damages incurred as a result of the delay.
[…]
358 . In the present circumstances, the Claimants argue that they have shown that “[b]ut for the conduct of the Ecuadorian courts, TexPet would have prevailed in its seven claims against the [Government] and obtained damages in the amounts requested in the underlying cases. Claimants are therefore entitled to those underlying damages from this Tribunal, plus interest and costs for the period of delay by the Ecuadorian courts” (C V, ¶407; C VI, ¶452).
[…]
2 . Arguments by the Respondent
365 . The Respondent argues that, in order to establish a denial of justice, the Claimants must prove that they have suffered a loss. In this case, the Claimants have not shown a loss resulting from the delays or from the dismissals of their cases. The Claimants cannot prove that they would likely have prevailed in their court cases. Nor can the Claimants show the existence of any harm resulting from delay that is not reparable through an award of pre-judgment interest.
366 . The Respondent contends that a showing of State responsibility requires the establishment of three elements: (1) that a violation of international law has occurred, (2) that the violation can be attributed to the respondent State, and (3) that injury has resulted to the claimant. The lack of any of these is fatal to any claim for State responsibility. The Respondent cites many authors as well as the Chorzów Factory case122 in support of this point. Many of them further confirm its application to a denial of justice claim (R V, ¶¶437–442; R VI, ¶¶530–531).
367 . Loss due to an international wrong is, in turn, measured by the comparison of the victim’s actual situation to that which would have prevailed had the act not been committed. In the case of denial of justice, the loss is the loss of the opportunity to receive a final judgment in each case before the local judicial system. The Respondent cites Paulsson on the subject:
If a foreigner’s claim before a national court was thwarted by a denial of justice, the prejudice often falls to be analysed as the loss of a chance — the possibility, not the certainty, of prevailing at trial and on appeal, and of securing effective enforcement against a potential judgment debtor whose credit-worthiness may be open to doubt.
368 . In order to prove their loss, the Claimants are therefore required to prove in this case that they were more likely than not to prevail on the merits of their cases. Any other result “would be contrary to the principle of restitutio in integrum” (R V, ¶¶447–449; R VI, ¶¶532–533; Tr. II at 138:4–22, 1186:24–1187:8; HR4 p. 171).
369 . The Respondent further asserts that the Tribunal’s task in this regard is to determine what an Ecuadorian court, applying Ecuadorian law, would have done in these cases. The Claimants’ alleged “loss” in this case is the chance for a judgment by the Ecuadorian courts. The Tribunal must thus refrain from directly adopting its own interpretation of the 1973 and 1977 Agreements where such an interpretation would not accord with Ecuadorian law and practice (R VII, ¶¶145–146; R VIII, ¶60). According to the Respondent, this idea is particularly pertinent when addressing the validity of the 1977 Agreement, which the Respondent alleges is invalid under Ecuadorian law. The question of validity is governed in this arbitration by Ecuadorian law, as it would have been in the Ecuadorian courts, and the Respondent is not estopped by any principle of international law from raising this defense. The Respondent quotes Sornarajah in this regard:
[W]here…the state clearly contracts in order to achieve a public benefit, the failure to follow the procedures designed to safeguard public interest will be looked at differently… The assumption simply is that a large corporation making a contract with the state does so almost on an equal footing with the government or public corporation. It should familiarize itself with the procedure for making the contract as well as the authority and power of the corporation and the officers acting on its behalf to make the contract.
370 . Following on the above, the Respondent argues that the Claimants have not and cannot meet their burden to show that they would more likely than not have prevailed on their Ecuadorian court cases. This is demonstrated in their arguments presented with respect to the underlying cases (see Section H.VI below). Furthermore, the Respondent notes that, contrary to their present arguments in this arbitration, the Claimants never alleged breaches of the 1977 Agreement before the Ecuadorian courts in Cases 7-92 or 153-93. They must therefore prove breaches of the 1973 Agreement in those cases to show that they would have prevailed in Ecuadorian courts (R VI, ¶¶537–538; R VII, ¶¶63–65).
371 . Further to their other arguments on damages, the Respondent asserts that the Claimants’ loss, if any, is the opportunity to have their cases decided. Even if the Claimants are able to show that they would have more likely than not prevailed in those cases, they cannot “prove that there is a hundred percent certainty that they would prevail” (Tr. II at 156:8–10). The Tribunal should therefore use the “loss of a chance” principle to award only the damages corresponding to the likelihood of success that TexPet had of prevailing on the merits of its Ecuadorian court cases. The Respondent insists that the Claimants cannot “ask the Tribunal to assume away the uncertainty associated with the litigation process” and asserts that “it is important that the relief awarded not overcompensate the victim” (R V, ¶689). This can be done here “by taking into account the chances — rather than the certainty — of success on the merits in the underlying actions” (R V, ¶689). The Tribunal should thus multiply the damages it determines by TexPet’s probability of success in the Ecuadorian courts. The Respondent contends that multiple legal systems endorse this principle, as have a number of investor-State arbitrations, notably in the application of the “discounted cash flow” method to lost income-producing opportunities. This principle is also consistent with approaches taken in a number of jurisdictions with regard to legal malpractice cases where the negligence forecloses a claimant’s chance to win a lawsuit. It is further enshrined in transnational sources such as Article 7.4.3(2) of the UNIDROIT Principles of Commercial Contracts, often applied by ICC tribunals (R VI, ¶680).
[…]
3 . The Tribunal
374 . The Tribunal initially notes that both sides refer to the Chorzów Factory case as authoritative and agree that the loss due to an international wrong is to be measured by the comparison of the victim’s actual situation to that which would have prevailed had the illegal acts not been committed (C V, ¶¶403–406; C VI, ¶¶446–453; R V, ¶¶437–442; R VI, ¶¶530–531). Both sides further agree that, according to the “but for” analysis demanded by Chorzów, the Tribunal may only award compensation to the Claimants if the Claimants are able to prove that they would more likely than not have prevailed on the merits in their cases before the Ecuadorian courts, that is if the Tribunal believes that the underlying claims have merit and should have been accepted by the Ecuadorian courts (C VI, ¶458; R V, ¶447; R VI, ¶533). In essence, the Claimants must prove the element of causation — i.e., that they would have received judgments in their favor as they allege “but for” the breach by the Respondent.
375 . Applying the above principle, and in keeping with the fact that the Claimants’ alleged primary “loss” in this case is the chance for a judgment by the Ecuadorian courts, the Tribunal must ask itself how a competent, fair, and impartial Ecuadorian court would have resolved TexPet’s claims. The Tribunal must step into the shoes and mindset of an Ecuadorian judge and come to a conclusion about what the proper outcome of the cases should have been; that is, the Tribunal must determine what an Ecuadorian court, applying Ecuadorian law, would have done in these cases, rather than directly apply its own interpretation of the agreements.
376 . The Tribunal notes that this is a different test of causation from that which would apply to the evaluation of other substantive bases for State responsibility on the basis of a domestic court’s actions. One must be careful not to confuse the two. The more deferential standard of what is “juridically possible” within the Ecuadorian legal system may be the applicable standard if what was being evaluated was whether Ecuador breached Article II(7) (or committed a denial of justice) through a court’s rendering of a manifestly unjust decision. There appears to be some agreement between the Parties and the sources they cite on this point (C VI, ¶341; R VI, ¶¶321–323; R VII, ¶43). In light of its finding that, prior to the issuance of any relevant decision by the Ecuadorian courts, Article II(7) had already been breached by reason of undue delay, the Tribunal need not express a view on what the exact standard of review would be if the question before it concerned compensation for the consequences of a manifestly unjust decision. It is not relevant whether any decision rendered after the completion of that breach was manifestly unjust or not. As mentioned above (see Section H.II above), once delay has become unreasonable and a breach of the BIT has been completed, a decision issued after that date cannot affect the liability of the State for the undue delay. The decisions issued by the Ecuadorian courts after the completion of the breach of Article II(7) can only impact the questions of causation and damages that flow from that breach.
377 . The Tribunal’s task, given a completed breach for undue delay, is to evaluate the merits of the underlying cases and decide upon them as it believes an honest, independent, and impartial Ecuadorian court should have. In doing so, the Tribunal may take into account a judgment issued after the critical date as evidence of how a hypothetical honest, independent, and impartial Ecuadorian court would have decided. However, the Tribunal owes that judgment no deference. The Tribunal must weigh it against other evidence before the Tribunal as to how the court should have decided and come to its own conclusions on the matter.
378 . The above considerations also lead the Tribunal to reject the Respondent’s “loss of chance” argument. Given that the Parties agree with Paulsson’s assertion that “[t]he goal of reparations in international law is to restore the victim of a breach to the position it would have enjoyed if the infraction had not occurred,” the Tribunal must determine what TexPet should have received in judgments issued by the Ecuadorian courts. No matter what their estimation of the merits of the claims, it is clear that the Ecuadorian courts would not have applied a discount factor based on the doctrine of “loss of chance” when issuing a judgment.
379 . Furthermore, the uncertainty involved in the litigation process that is noted by the Respondent is taken into account in determining the standard of review. As noted above, if the alleged breach were based on a manifestly unjust judgment rendered by the Ecuadorian court, the Tribunal might apply deference to the court’s decision and evaluate it in terms of what is “juridically possible” in the Ecuadorian legal system. However, in the context of other standards such as undue delay under Article II(7), no such deference is owed. As Paulsson’s opinion in this arbitration has stated, the Ecuadorian courts have “already had their chance [to decide the cases] and have failed to do so.” It thus falls to the Tribunal to step into the shoes of the Ecuadorian courts and decide the merits of the cases as it determines a fair and impartial judge in Ecuador would have decided the matter.
380 . The Tribunal finds that Paulsson’s treatise is consistent with this view. The passages cited by the Respondent only appear to stand for the proposition that simply proving the breach does not automatically entitle a claimant to get the amount of his original claim, but that he must prove the merit of that underlying claim.
381 . Moreover, the Respondent cannot simultaneously maintain both (1) that a claimant be required to prove that it would more likely than not have prevailed in the domestic courts and (2) that a claim be discounted to reflect the probability of success. To apply both propositions would lead to an approach that would necessarily and systematically undercompensate claimants in cases that allege misconduct by a State’s judiciary. Indeed, the inconsistency of these two arguments is highlighted when the Respondent asks the Tribunal to apply 14% as the appropriate discount factor (R VI, ¶688). To accept 14% as the probability of Claimants’ success in their cases would logically mean that the Claimants have not sustained their burden to show that they would more likely than not have prevailed in the Ecuadorian courts.
382 . Finally, the “loss of chance” principle does not have wide acceptance across legal systems such that it can be considered a “general principle of law recognized by civilized nations.” At most it can be said that the “loss of chance” principle is applied in exceptional situations where there exists a “harm whose existence cannot be disputed but which it is difficult to quantify,” (FN: UNIDROIT Principles of International Commercial Contracts with Official Commentary, art. 7.4.3(2) (1994) [hereinafter UNIDROIT Principles]) (sic) as noted in the commentary to the UNIDROIT Principles cited by the Respondent. In this case, the Tribunal finds no exceptional difficulties in coming to a conclusion as to what should have occurred but for the breach of the BIT and what damages result therefrom. The Tribunal therefore declines to apply the “loss of chance” principle.
[…]
H.VI . The Underlying Seven Court Cases in Ecuador
[…]
3 . Force Majeure case (Case 8-92)
a) Arguments by the Claimants
473 . As for the Force Majeure case (Case 8-92), the Claimants also argue that they made a clear and irrefutable case. An earthquake, which hit Ecuador on March 5, 1987, destroyed several kilometers of the Trans-Ecuadorian pipeline. This effectively “shut in” TexPet’s production capacity. TexPet, however, through a Colombian pipeline, provided to Ecuador the crude oil that it had in its storage tanks in Ecuador. During the months following the earthquake (the force majeure period), TexPet thus supplied Ecuador with 100% of its production plus all of its stored oil. Given the inability of Ecuador’s refineries to refine oil, CEPE instead bartered fuel oil produced with TexPet’s crude (obtained at the domestic price) for other derivative products to meet domestic consumption during this time.
474 . The Claimants argue that Clause 19 of the 1973 Agreement only required TexPet to contribute in proportion to its actual production during a given quarter. Clause 19.1 of the 1973 Agreement, for example, requires oil producers to “supply an equal percentage of the oil belonging to them.” This percentage is calculated “every quarter by dividing the domestic national consumption of barrels per day into the total production corresponding to such producers, also expressed in barrels per day, and multiplying the result times one hundred.” Once the Trans-Ecuadorian pipeline was restored, however, Ecuador required TexPet to retroactively contribute over 100% of its output to Ecuador’s domestic consumption during the force majeure period, thereby “effectively shift[ing] to TexPet all the burden of the effects of the earthquake” (C V, ¶¶137–142; C VI, ¶¶98–101; Tr. II at 1067:25–1068:20; HC5 p.36).
475 . The Claimants summarize the legal arguments put forward by TexPet for its claim as follows:
“Pursuant to the 1973 Agreement, TexPet’s obligation to contribute crude oil for domestic consumption was proportionate to and contingent on its own production of crude oil. Thus, because TexPet was unable to produce crude oil (or only produced very small volumes) during the time period following the earthquake, its obligations to contribute to domestic consumption were concomitantly reduced in proportion to its production. Furthermore, under the applicable force majeure provisions of the Ecuadorian Civil Code, TexPet had no obligation to contribute additional volumes of crude oil to cover its lack of contribution during the force majeure period, and it certainly was not required to contribute crude oil retroactively to compensate for the derivatives that [Ecuador] imported”(C V, ¶¶143–144)
476 . The Claimants contest the Respondent’s argument based on the idea that obligations are only suspended and not extinguished by force majeure under Ecuadorian law. While this premise may be true, the resumption of TexPet’s obligations after the force majeure period still did not require TexPet to retroactively contribute crude from subsequent quarterly production to satisfy domestic consumption corresponding to earlier quarters. Contrary to the Respondent’s attempts to do so, the retroactive contributions also cannot be categorized as mere “true-ups” of previous quarterly contribution estimations. All these arguments are consistent with what was put forward originally by TexPet in the underlying Ecuadorian litigation (C VI, ¶¶102–104; C VIII, ¶¶66–68).
477 . The legal foundation of the claim is confirmed by Mr. Paz, the Claimants’ expert on Ecuadorian law (C V, ¶145). The Claimants’ position that the number of barrels over-contributed in the case is clearly stated in government documents, which was confirmed in Ecuadorian courts by the parties’ experts on both sides, and was further confirmed by Navigant (C V, ¶¶137–150).
b) Arguments by the Respondent
478 . The Respondent also contests the merits of the Force Majeure case (Case 8-92). The earthquake of March 5, 1987 damaged the Trans-Ecuadorian pipeline and effectively “shut in” all the crude that would have been otherwise available to supply local refineries. During the force majeure period, producers were required to deliver whatever oil they could deliver through an alternative pipeline. This was far less, however, than what was needed to satisfy domestic consumption.
[…]
479 . After the pipeline was repaired, all the producers, including TexPet, were required to contribute compensation crude purchased at the domestic price over a period of 14 months to be sold on the international market to compensate for the emergency transactions noted above (R V, ¶¶585–589).
480 . In its claim, TexPet argued, not that the 1977 Agreement or some principle of non-retroactivity was breached as it argues now, but that its obligation to contribute crude to domestic consumption was contingent on its own production of crude oil and therefore claimed that its own reduced capacity during the force majeure period led to a concomitant reduction in its required contributions. The Respondent claims that there is no support anywhere for establishing that TexPet’s contribution obligations are conditional. The Respondent asserts that this argument runs directly counter to Clause 19 of the 1973 Agreement and Article 30 of the Hydrocarbons Law, which provide that export of oil by TexPet will only be authorized “once the needs of the country have been satisfied” (R V, ¶¶590–596).
481 . Moreover, the argument that this constituted a “retroactive” requisitioning of crude ignores the discretion accorded to the Ministry by Clause 19.1, which says that crude can be requested “when [the Ministry] deems it necessary.” The Claimants’ translation of Clause 19.1 is erroneous insofar as it negates this discretion, which is clear from the Spanish text. However, even if estimates and forecasts would be provided quarterly, the parties’ practice clearly demonstrate that “retroactive” requests were regularly made to reconcile the quarterly estimates to the actual production and consumption figures of a given quarter. Regardless, the Respondent points out that this retroactivity argument was not properly pursued in the underlying court litigation (R VI, ¶¶630–645; Tr. 153:2125, 154:17–23; HR4 p. 164; R VII, ¶¶108, 110, 112).
482 . The Respondent further argues that this absolute obligation of contribution was also not defeated by the doctrine of force majeure under Article 1590 (currently 1563) of the Ecuadorian Civil Code. According to the Respondent, “[u]nder Ecuadorian law, the doctrine of force majeure releases a debtor from liability due to delay in performing the contractual obligation, but does not eliminate the obligation itself.” Force majeure therefore merely deferred TexPet’s duty to contribute to domestic consumption. The Respondent further submits that force majeure is subject to an exception when “the thing that is owed has not been damaged” and it is evident that the crude owed by TexPet was not damaged (R V, ¶¶597–600; R VI, ¶¶646–649; Tr. II at 154:4–16; HR4 pp. 163–164; R VII, ¶109).
483 . The Respondent claims that the conduct of the parties to the 1973 Agreement confirms this understanding of TexPet’s obligations following the earthquake and that TexPet’s conduct, in fact, amounts to a waiver under Ecuadorian law that would prevent recovery by TexPet in any event (R V, ¶¶601–602; R VI, ¶¶650654; Tr. II at 154:24–155:2; HR4 pp. 166–167; R VII, ¶111).
c) The Tribunal
484 . The Tribunal reiterates that its task is to decide the case as it determines an honest, independent, and impartial Ecuadorian judge, applying Ecuadorian law, would have done.
[…]
487 . With respect to TexPet’s underlying claim, the Tribunal recalls the second paragraph of Article 19.1 of the 1973 Agreement, which sets out the formula for determining the producers’ oil contribution obligations:
“19.1 […]The percentage referred to in the preceding paragraph shall be applied to all the producers in the country, including CEPE, and will be determined quarterly by dividing the national domestic consumption in barrels per day by the total production corresponding to such producers, also expressed in barrels per day, and multiplying the result by 100.”
488 . The language of the above formula stipulates that TexPet’s contribution obligation is to be calculated as a proportion of its total quarterly production. The maximum contribution in any given quarter must necessarily then be capped at 100% of said total quarterly production. Therefore, aside from issues of force majeure, the Tribunal finds that TexPet met and exceeded its obligations when it contributed all its production and inventory during the quarters that the Trans-Ecuadorian pipeline was non-operational due to damage from the earthquake. As the Claimants argue, Ecuador’s further requisitioning of crude oil in later quarters at the domestic price to make up for earlier emergency purchases of derivatives abroad during the earthquake period constituted a retroactive request that conflicts with the provisions of the 1973 Agreement. Since the Tribunal determines that no further obligation existed to contribute beyond the maximum production in a given quarter, there was no obligation to be reduced or deferred by the doctrine of force majeure under Ecuadorian law. These issues are therefore moot.
489 . Moreover, the doctrine of force majeure, like the doctrine of hardship and other related concepts, is designed to “distribute between the parties in a just and equitable manner the losses and gains resulting from” an unforeseeable event.(FN: Art. 6:111(3)(b) Principles of European Contract Law 2002; UNIDROIT Principles, at art. 7.1.7 comment 3; id. at arts. 6.2.2 and 6.2.3(3)(b)). The Respondent’s interpretation would in fact mean that any negative effect of a force majeure situation would exclusively have to be borne by TexPet and in no way by the Respondent. The Respondent has not been able to show that the 1973 Agreement or Ecuadorian law provide support for such an unusual interpretation in cases of force majeure.
490 . On the basis of the above, the Tribunal finds that an honest, independent and impartial Ecuadorian judge would have ruled in TexPet’s favor in the Force Majeure case (Case 8-92).
I . Decisions
For the foregoing reasons, the Tribunal renders the following decisions:
1 . From the Interim Award of December 1, 2008, the Tribunal recalls the following decisions:
1 . The Respondent’s jurisdictional objections are denied.
2 . The Tribunal has jurisdiction concerning the claims as formulated by the Claimants in their second Post Hearing Brief dated August 12, 2008, in paragraph 116.
2 . The Respondent has breached Article II(7) of the BIT through the undue delay of the Ecuadorian courts in deciding TexPet’s seven court cases and is liable for the damages to the Claimants resulting therefrom.
3 . The Claimants have not committed an abuse of process and are not estopped from bringing the present claim against the Respondent.
4 . In view of the Tribunal’s decision in section 2 above regarding the breach of Article II(7) of the BIT, and given that the relief sought by Claimants with respect to its additional claims does not go beyond that sought pursuant to the claim regarding Article II(7), the Tribunal need not decide the Claimants’ claims regarding other breaches of the BIT or customary international law.
5 . As a result of the Tribunal’s decision in section 2 above that the Respondent has breached Article II(7) of the BIT, the Respondent is liable for damages caused to Claimants by that breach. The amount of such damages will be decided by the Tribunal with the help of a procedure set out in a separate Procedural Order of the Tribunal to determine what taxes, if any, would have been due to the Respondent if no breach of Article II(7) of the BIT had occurred.
6 . The Respondent is liable for pre-award compound interest at the New York Prime Rate (annual) on the final amount to be paid by Respondent according to section 5 above, from December 22, 2006 until the date that this sum becomes payable by Respondent.
7 . The Respondent shall be liable for post-award compound interest at the New York Prime Rate (annual) on the amount awarded by the Tribunal, from the date that the Tribunal orders payment by the Respondent until the date payment is made.
8 . The decision regarding the costs of arbitration is deferred to a later stage of these proceedings.
9 . All other claims are dismissed.
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