ICSID tribunal renders interim decision on Ecuador’s environmental counterclaim in long-running dispute

Perenco Ecuador Limited v. Republic of Ecuador, ICSID Case No. ARB/08/6

Perenco Ecuador Limited (Perenco)—a French-owned oil and gas company—and the Republic of Ecuador have been involved in arbitration since 2008 under the France–Ecuador bilateral investment treaty (BIT) and certain concession contracts. An International Centre for Settlement of Investment Disputes (ICSID) arbitration tribunal has issued an Interim Decision on the Environmental Counterclaim (Interim Decision).

The Interim Decision includes an invitation for the parties to settle the issues in dispute. The ICSID tribunal criticized the testimony of both sides’ experts and suggested that the parties use a tribunal-appointed expert. The tribunal declined to immediately decide the issues raised by the counterclaim, indicating instead a willingness to do so in a future, final decision.

Background

Perenco was constituted under the laws of the Bahamas. A controlling interest in Perenco is indirectly held by the estate of the late Hubert Perrodo, a French national. Perenco, along with a Texas-headquartered oil and gas company (Burlington Resources), which has subsequently been acquired by the international major ConocoPhillips, invested in the operation of two hydrocarbon blocks through Ecuadorian participation contracts.

Following a political transition in Ecuador, Perenco was subjected to progressive windfall taxes of 50 and 99 per cent. Following imposition of the second levy, Ecuador’s national oil company Petroecuador took over operation of the blocks. In April 2008, Perenco filed with ICSID a request for arbitration against Ecuador and Petroecuador. Ecuador’s December 2011 counter-memorial alleged that Perenco’s activities had resulted in significant environmental damage (environmental counterclaim) and amounted to a failure to properly maintain the blocks’ infrastructure in good working condition (infrastructure counterclaim).

In a September 2014 Decision on Remaining Issues of Jurisdiction and on Liability, the tribunal confirmed an earlier finding of jurisdiction under both the BIT and the participation contracts. It also found Ecuador liable to pay compensation to Perenco under these same instruments.

The 2014 decision noted that the parties had agreed to a separate briefing schedule and hearing on Ecuador’s counterclaims. Ecuador alleged that Perenco had left behind an environmental catastrophe and sought approximately 2.5 billion USD in compensation for necessary remediation. Perenco argued that that its liability did not exceed 10 million USD. The tribunal has now issued the Interim Decision.

Parties’ experts “effectively shooting at different targets”

After reviewing the evidence, the tribunal was satisfied that there was at least some contamination for which Perenco would likely be held liable. However, it also noted that each of the parties’ expert witnesses was “attempting to achieve the best result for the party by whom they were instructed, and that they crossed the boundary between professional objective analysis and party representation.” They were “effectively shooting at different targets and this has made the work of this Tribunal most difficult” (para. 581).

In this context, the tribunal found that the only equitable solution in relation to the contamination problems would be to have a new expert examine the existing samples; if the problems were deemed to warrant remediation in light of all relevant circumstances, Perenco, its predecessor Petroamazonas, or both could be found prima facie liable for remediation costs. Only once this and certain other procedures have been completed would the parties be in a position to reach a negotiated settlement or the tribunal in a position to make a final determination of any damages owed by Perenco to Ecuador.

Fault-based liability applies during initial investment period

Having reviewed the parties’ written and oral submissions, as well as expert evidence, the tribunal arrived at a series of conclusions as to the manner in which the counterclaim was put and the state of the dispute.

With regards to any contamination in excess of regulatory standards shown to have occurred between September 4, 2002 (when Perenco acquired its interests in the blocks) and October 19, 2008 (when Ecuador’s current Constitution was promulgated), the tribunal found that a fault-based regime must apply. However, liability for any excess contamination shown to have occurred after October 20, 2008 should be assessed on the basis of strict liability, in accordance with the 2008 Constitution’s regime for environmental damage.

Tribunal resolves relationship between environmental regulations and “background values”

The tribunal considered the relationship between the 2008 Constitution and domestic environmental regulations as the first of two major questions, the resolution of which narrowed the need for any further analysis. It found that the 2008 Constitution was the state’s supreme legal framework within which other regulations specific to hydrocarbon activities must operate.

Ecuador had argued that its hydrocarbons regulatory regime should give way to “background values” found in the Constitution, such as full remediation of contamination. After carefully considering the arguments and the evidence, the tribunal found that it could not accept this argument. While nothing precluded Ecuador from promulgating regulations that would hold oilfield operators to more stringent environmental standards, the 2008 Constitution alone was not a substitute for such regulations.

In principle, the tribunal also noted the issue of whether the 2008 Constitution’s strict liability regime could be applied to Perenco’s pre-2008 activities. Having found that the 2008 Constitution could not in and of itself establish technical standards, the tribunal found that it must look to the specific regulations enacted “on the ground” by the Ecuadorian state both before and after 2008.

Decision on infrastructure counterclaim reserved

Finally, the tribunal noted that it was most expedient and constructive to issue its decision on the environmental counterclaim first so as to permit the new expert to be selected, appointed, and instructed on his or her mandate, and only to then engage in the work that needs to be done. The tribunal further noted that it was likely to benefit from the evidence regarding Perenco’s operation to be presented in a future hearing. It therefore reserved the infrastructure counterclaim to be addressed along with the overall quantum of damages.

Notes: The tribunal is composed of Judge Peter Tomka (President appointed by the Chairman of the ICSID Administrative Council, Slovak national), Neil Kaplan (claimant’s appointee, British national), and Christopher Thomas (respondent’s appointee, Canadian national). The Interim Decision on the Environmental Counterclaim of August 11, 2015 is available at http://www.italaw.com/sites/default/files/case-documents/italaw6315.pdf

Matthew Levine is a Canadian lawyer and a contributor to IISD’s Investment for Sustainable Development Program.