As a $27 billion lawsuit against Chevron is getting close to a ruling in Ecuador, the US oil giant and its lawyers are betting a pending international arbitration case can avert the cost of an unfavorable ruling in the South American country.
Last week, U.S. federal judge Leonard Sand dismissed an attempt by the government of President Rafael Correa to block an international arbitration in the lawsuit.
"The decision …was important because it preserves Chevron’s ability to continue with the arbitration in a neutral forum,” says Ed Kehoe, co-head of the International Arbitration Practice at U.S. law firm King & Spalding and an attorney for Chevron in this and other arbitration cases. “It is quite significant because what Ecuador was attempting to do was stop Chevron from being able to challenge the treatment it has received in Ecuador from the government in the international forum.”
Chevron has repeatedly denounced the lawsuit proceedings in Ecuador as unfair and tainted by everything from bias from the court-appointed expert who came up with the $27 billion number to government interference and bribery. It also denounced the indictments against two Chevron attorneys involved in the case.
”What makes this case unique is not that it’s simply a dispute with each side having an argument," Kehoe says. “It is blatant favoritism by the court and court-appointed expert with the government of Ecuador standing behind it with its thumb on the scale of justices.”
Under a 1997 U.S.-Ecuador bilateral investment treaty, a U.S. company is allowed to file an arbitration claim if it is denied protection as an American investor, he points out.
Chevron isn’t the only one complaining about the lack of judicial fairness in Ecuador. “Legal certainty is far and away the biggest question mark for any company considering a significant capital investment in Ecuador,” says Patrick Kilbride, director of Western Hemisphere affairs at the U.S. Chamber of Commerce.
In addition to withdrawing from The World Bank’s International Center for Settlement of Investment Disputes (ICSID) effective in January this year, Ecuador has renounced nine bilateral investment treaties, he points out.
“Across the region, we’re seeing that the absence of rule of law has a chilling effect on inward investment,” Kilbride says. "It’s not limited to Ecuador, but Ecuador has clearly been a case study with some of the lowest annual FDI inflows in the region.”
According to a Latin Business Chronicle analysis, Ecuador has South America’s third-lowest FDI rate compared to its GDP. Only Paraguay and Venezuela have lower rates. ”Annual FDI inflows to Ecuador have been generally anemic,” Kilbride says.
Instead, Ecuador is becoming a global leader in arbitration claims. Ecuador now has the world’s second-highest number of pending arbitration claims, according to Chevron spokesman Kent Robertson.
”Looking strictly at the policy climate toward investment, you have to wonder whether the government really wants new foreign investment,” Kilbride says.
The lawsuit against Chevron dates back to 1993. It was originally filed in the United States, but was thrown out here in 2002. Then the case was re-filed in Ecuador. The lawsuit claims that Chevron is responsible for environmental damage in Ecuador because of Chevron unit Texaco’s operations there from 1964 to 1990.
When Texaco left Ecuador completely in 1992 it undertook a $40 million remediation and reached an agreement with the government that it would be free from any future lawsuits. However, the current government of Ecuador has violated that agreement and has repeatedly – and openly – supported the lawsuit against Chevron.
Chevron has countered that any environmental damages are the fault of Ecuador's state oil company PetroEcuador, which is infamous for its poor environmental track record. Chervon has also complained about the unfair treatment it has received by the judicial system in Ecuador and asked that the case be thrown out. However, the case will likely result in a ruling as soon as next month.
Due to the court’s bias – and pressure from President Correa – the most likely outcome is against Chevron.
However, the chances that Chevron actually is forced to pay the $27 billion is less likely if the U.S. oil company wins its arbitration case. In the meantime, the case will also delay any international rulings against it, Kehoe says. The plaintiffs will likely try to get various U.S. and international courts to force Chevron to pay damages if the Ecuador courts finds in their favor.
An international tribunal has only recently been appointed for the arbitration case and now the process starts whereby both parties will be arguing over the initial hearing and the tribunal has to set a schedule. The case will then feature testimony and documents from each party. ”We will move promptly to move the case forward,” Kehoe says.
Meanwhile, Chevron has a second arbitration case pending against Ecuador in connection with a lawsuit against that country. In that case, Chevron says that Ecuador had illegally profited from an agreement Texaco had to provide oil to Ecuador at below market prices. Ecuador, in turn, sold some of that oil globally to make a profit, Chevron says.
Chevron filed its lawsuit in Ecuador originally, but no court would handle the case. “After 11 years, Chevron filed an international arbitration case in Hague [since] it was denied of justice,” Kehoe says. “When a court system refuses to rule in your case you have to do something.”
He expects a ruling on that case within a month or two. A hearing in the case was held in Washington, D.C. in April last year.
Meanwhile, Kilbride says Ecuador can boost its investment climate immediately if it truly wanted to.
“Ecuador holds its fate in its own hands,” he says.
In 2003, the United States announced it would negotiate free trade agreements with Ecuador and its Andean neighbors. Today, Peru’s agreement is in place and Colombia’s awaits Congressional consideration. Meanwhile, Ecuador and Bolivia have gone the opposite route. And instead of signing FTAs, Ecuador renounces BITs. Bolivia has lost its tariff preferences; the same could happen to Ecuador, Kilbride says.
"Ecuador could turn this around tomorrow by reaffirming its commitment to international arbitration and the bilateral investment treaties it renounced,” he says. “Not to mentioning honoring the commitments made by previous administrations. Investor confidence begins with rule of law.”