The Era of Petroleum Arbitration Mega Cases: Commentary on Occidental V. Ecuador, ICSID Award, 2012
Garcia, Julian Cardenas, Houston Journal of International Law
I. THE AWARD A. The Facts B. The Tribunal's Reasoning II. OBSERVATIONS ON THE AWARD A. The Execution of an International Farmout Agreement B. Proportionality Analysis and Investment Arbitration C. Reduction of the Amount of Compensation Caused as a Consequence of Investor's Wrongful Acts and Tax Measures III. CONCLUSION
Occidental v. Ecuador arbitration award announced on October 5, 2012,1 represents the largest ICSID award in history in the new era of mega cases in international arbitration related to the oil industry. (2) The idea of mega cases refers to the amount of claims and compensations awarded which makes "ordinary" amounts that swing in the hundreds of millions and billions of U.S. dollars, in arbitration cases dealing with expropriations, tax reforms or environmental accidents in the oil and gas sector. (3) This, for sure, may surprise the general public, politicians and mass media, however, having in mind factors such as the current prices of commodities, the devaluation of the U.S. dollar and the current value of investments in natural resources producing high rates of returns, these larger amounts should not be unexpected at all.
But, considering the relevance of these figures in the economy of states and corporations, the ideal of a fair and efficient system of transnational dispute resolution is not exempted of risks. One of this is that since these claims are so large, split decisions will probably dominate international awards, instead of decisions strictly decided under applicable laws. (4) In these mega cases, we are witnessing a trend of arbitrators trying to find a balance between the expectations of foreign investors and host governments facing the dilemma of "too big to fail" using the law in a way that tries to favor both parties. (5) This position may work in some cases, but in others would be criticized when the solution provided by the arbitrator lessens the expectation of fairness of a community of states and investors who sought the settlement of the dispute through a specialized panel, in this case, a specialized panel deciding petroleum industry disputes avoiding unclarity and uncertainties.
From a historical perspective, the case Occidental v. Ecuador is anchored in the wave of expropriations and tax legislation reforms that occurred in Latin America after 2000, as oil prices increased. (6) The rise in oil prices expanded litigation and arbitration between host states and international oil companies in situations where oil and gas contracts failed to adapt to the new realities of the market, and renegotiations called for by governments were unable to result in an agreement under the new conditions. (7) Ecuador, as well as Venezuela, Bolivia and Argentina are among the Latin American countries with an increased number of cases being filed before the International Centre for Settlement of Investment Disputes (ICSID) related to the oil and gas industry. (8) The Occidental case is particularly relevant due to the substantial size of the award from a complex claim arising from the performance of a farmout agreement, the breach of a petroleum participation contract, and the state violation of a bilateral investment treaty (BIT). (9) Ecuador was ordered to pay Occidental $1.77 billion, plus interest, for .expropriating Occidental's interest in a participation contract over "Block 15" in the Ecuadorian Amazon. (10)
The ICSID Tribunal, composed of Mr. L. Yves Fortier (President), Mr. David Williams, and Professor Brigitte Stern, unanimously found that Occidental violated national law and breached the participation contract by transferring rights under a farmout agreement to a foreign investor, AEC, without the authorization of the Ecuadorian government. (11) However, the tribunal found that the reaction of Ecuador through the unilateral termination of the contract was disproportionate to Occidental's breach, thus finding that Ecuador not only violated Ecuadorian law and customary international law, but also that Ecuador failed to accord a fair and equitable treatment standard and that the administrative sanction was a measure that "tantamount to expropriation" under the U. …