Data

Date:: 24-05-2022
Country:: Arbitral Award
Number:: Case No. 2018-12
Court:: Permanent Court of Arbitration
Parties:: Gente Oil Ecuador Pte. Ltd. v. Republic of Ecuador

Keywords

STATE CONTRACTS - LONG-TERM CONTRACTS - EXPLORATION AND EXPLOITATION AGREEMENT - BETWEEN A SINGAPOREAN OIL COMPANY AND THE ECUADORIAN GOVERNMENT – REFERENCE BY BOTH PARTIES TO UNIDROIT PRINCIPLES IN ORDER TO SUPPORT APPLICABLE LAW (ECUADORIAN LAW)

INTERPRETATION OF THE ARBITRATION CLAUSE - IN ACCORDANCE WITH ECUADORIAN LAW - THE MAIN RULES FOR THE INTERPRETATION OF THE ARBITRATION AGREEMENT ARE THAT CONTAINED IN ARTS. 1576, 1579, 1580, 1578 AND 1582 OF THE ECUADOR CIVIL CODE, WHICH ARE CONSISTENT RESPECTIVELY WITH ARTS. 4.1, 4.3, 4.4, 4.5 AND 4.6 OF THE UNIDROIT PRINCIPLES

NOTION OF FORESEEABLE NON-PERFORMANCE – CLAIMANT'S REFERENCE TO THE LATIN AMERICAN PRINCIPLES OF CONTRACT LAW, THE CISG AND THE UNIDROIT PRINCIPLES (ART. 7.3.1)

DUTY OF GOOD FAITH IN A CONTRACTUAL RELATIONSHIP - REQUIRES A POSITIVE ATTITUDE OF LOYALTY BETWEEN THE PARTIES - CLAIMANT'S REFERENCE TO THE PRINCIPLE OF COHERENCE AND TO ART. 1.8 UNIDROIT PRINCIPLES

Abstract

This controversy arose from Ecuador’s alleged breach of several of its obligations under the contract for oil exploitation and exploration in an Amazon oilfield, signed with a Singaporean oil company in 2012.

The oil company (Claimant) filed a notice of arbitration in an UNCITRAL claim brought against Ecuador (Respondent) accusing the State of unilaterally seeking to impose new terms, failing to comply with an obligation to act in good faith, and preventing the company from performing the contract.

The Arbitral Tribunal ordered Ecuador to pay compensatory damages and moral damages to the company, plus interest and a portion of the costs of the proceeding and of its attorney fees. In paticular, the Arbitral Tribunal affirmed that Ecuador breached its obligation to perform the contract in good faith and consequently awarded the oil copany over $10 million in damages together with moral damages as compensation for damages caused to its reputation and good name.

As for the interpretation of the arbitration clause, the Government of Ecuador pointed out that, in accordance with the contract, its provisions should be interpreted in accordance with Ecuadorian law and, in particular, in accordance with the rules contained in Title XIII of Book IV of the Civil Code, which (i) are established in the same terms in the Civil Code of Chile; and (ii) are consistent with the UNIDROIT Principles for the interpretation of international commercial contracts (the “UNIDROIT Principles”). In particular, the main rules for the interpretation of the arbitration agreement are that contained in art. 1576 of the Ecuador Civil Code, which is consistent with art. 4.1 of the UNIDROIT Principles (“Once the intention of the contracting parties is clearly known, one must pay more attention to it than to the literal meaning of the words” (principle of subjective interpretation) and in art. 1579 Code civil, which is consistent with article 4.3 of the UNIDROIT Principles (the interpretation of a contract must be in accordance with its object and nature).

Moreover, in application of article 1580 C.C. (consistent with article 4.4 of the UNIDROIT Principles), the Government stated that the meaning that best suits the Arbitration Agreement was the one conform to the other provisions of the Contract. Furthermore, it added that, by virtue of article 1578 CC (consistent with article 4.5 of the UNIDROIT Principles), its interpretation should be preferred, since it is “the only one capable of producing legal effects".

Claimant added that the UNIDROIT Principles, cited by the Ecuadorian Government, confirm that it is possible to deviate from the simple, common or literal meaning of words only when both parties have agreed to give them a different meaning, an “extraordinary” situation that must be proven by the party who wants to take advantage of it. On the other hand, the Claimant referred to article 1582 Civil Code, consistent with article 4.6 of the UNIDROIT Principles, according to which “[a]mbiguous clauses that have been extended or dictated by one of the parties [ …] will be interpreted against it, provided that the ambiguity arises from the lack of an explanation that should have been given by it”.

As for the contractual remedies, Claimant indicated that contract termination is enabled when there are clear indications that the other party will not comply with its obligations, which, it affirms, has been accepted by jurisprudence and doctrine under the notion of foreseeable non-performance. In this sense, the Claimant referred to the Latin American Principles of Contract Law, the CISG and the UNIDROIT Principles (art. 7.3.1).

Finally, as for the violation of the duty of good faith, the Claimant affirmed that, in contractual matters, the duty of good faith requires a positive attitude of loyalty that allows the creditor to trust that the debtor will remain faithful to what was agreed. The Claimant stated also that this framework of trust is generated, among others, (i) through an attitude of cooperation, which implies the adoption of positive behaviors that are not explicitly agreed upon, but that are legitimately expected by the parties; and (ii) through coherence in contractual relationships, with the parties having to avoid contradictions in their conduct (reference to art. 1.8 UNIDROIT Principles).

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