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Occidental Exploration & Production Co. v. Republic of Ecuador. Final Award. London Court of International Arbitration Administered Case No. UN 3467

Published online by Cambridge University Press:  27 February 2017

Susan D. Franck
Susan D. Franck*
Affiliation:
University of Nebraska College of Law
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Type
International Decisions
Information
American Journal of International Law , Volume 99 , Issue 3 , July 2005 , pp. 675 - 681
Copyright
Copyright © American Society of International Law 2005

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References

1 Occidental Exploration & Production Co. v. Republic of Ecuador, Final Award, London Court of International Arbitration Administered Case No. UN 3467 (arbitral tribunal July 1, 2004), at <http://ita.law.uvic.ca/documents/Oxy-EcuadorFinalAward_001 .pdf> [hereinafter Award].

2 Treaty Between the United States of America and the Republic of Ecuador Concerning the Encouragement and Reciprocal Protection of Investment, Aug. 27, 1993, at <http://www.sice.oas.org/bits/usecu_e.asp> [hereinafter U.S.-Ecuador BIT].

3 Award, supra note 1, paras. 25–26, 95.

4 Id., paras. 1, 27–28, 95–96.

5 Id., paras. 26, 30, 96. A central issue in the arbitration was determining whether OEPC was entitled to a refund or tax credit. Id., paras. 2–3, 122–34.

6 In the event of a modification of the tax regime, for example, the parties would amend the contract to “reestablish the economy” of the original bargain. Id., paras. 103–05, 111.

7 OEPC asked if imports of “equipment, machinery, materials and other consumable supplies” would be subject to VAT. Id., para. 102. The Award suggests that under the tax law then in effect, OEPC would have been entitled to a refund and that services were not subject to VAT. Id.; see also id., paras. 117–55 (discussing pre– and post–May 1999 Ecuadorian tax law).

8 OEPC believed it was entitled to apply for VAT refunds since it believed that Factor X payments did not include the equivalent of VAT refunds. The 1999 contract did not refer to VAT refunds and referred only to “collection” (i.e., payments and not refunds) of VAT. Petroecuador also lacked legal capacity to negotiate with OEPC regarding VAT. Id., paras. 103–08.

9 Id., paras. 3, 32.

10 Id., para. 73.

11 Id., paras. 114–15.

12 Id., paras. 83, 85, 89, 92. The tribunal explained that a deprivation must involve a significant part of the investment and affect the use of property or a reasonably expected economic benefit. Id., paras. 87–90.

13 Id., para. 161; see also U.S.-Ecuador BIT, supra note 2, Art. II(3)(b).

14 Award, supra note 1, paras. 162–63; see also id., para. 164 (suggesting incorrect contractual interpretation was arbitrary).

15 Id., para. 167. The BIT, supra note 2, Art. 11(1), requires that investments be treated “on a basis no less favorable than that accorded in like situations to investment... of its own nationals . . . or of nationals . . . of any third country, whichever is most favorable.”

16 Award, supra note 1, paras. 136, 168. The industries eligible for refunds included, for example, bananas, flowers, lumber, mining, African palm oil, and seafood. Id.

17 Id., paras. 173–76.

18 Id., para. 177.

19 Id., para. 180. In this context, the Award quotes Article II(3)(a) of U.S.-Ecuador BIT, supra note 2, which provides: “Investment shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and shall in no case be accorded treatment less favorable than that required by international law.”

20 The preamble provides that “fair and equitable treatment of investment is desirable in order to maintain a stable framework for investment and maximum effective utilization of economic resources.” U.S.-Ecuador BIT, supra note 2, pmbl.; Award, supra note 1, para. 183.

21 Award, supra note 1, paras. 183–85.

22 Until the end of April 1999, Ecuador charged VAT only on a limited number of goods, but this policy was then changed to include almost all goods and services. Id., paras. 119–21. Under the old statutory regime, Article 65 provided exporters with a tax credit and refund. Under the new regime, Article 65 dealt only with tax credits (not refunds), and Article 69 provided that if VAT was paid on local purchases or importation of goods used in the “manufacture of goods,” there was a right to a tax refund. Award, supra note 1, paras. 122–25. The new tax regulation 169 (as amended in June 1999) provided a clear procedure for receiving a refund under Article 69, but there was contradictory case law as to whether oil producers—who were extracting a natural resource and then exporting it with minimal modification—were manufacturers. Id., paras. 129, 140–42. The definition of “manufacturing” is a perennial question in tax law.

23 Award, supra note 1, paras. 184, 186, 187, 196.

24 Id., para. 187.

25 Id., paras. 190–92. Part of Ecuador’s legal framework was Andean Community law, which the tribunal concluded formed a basis for finding that OECP was entided to a VAT refund. Id., paras. 145–52. The tribunal noted that international law does not generally provide a right to a VAT refund (except in the specific case of Andean Community law), but it did not factor this consideration into its analysis as to whether there was a violation of fair and equitable treatment. Id., para. 191

26 There are numerous places in the Award where the tribunal makes express references to specific provisions of 1999 contract, see, e.g.,id., paras. 29, 73, 93, 115, 134, 164, 166, 184, and it even explains that its analysis of the contract “is case specific,” id., para. 115. Another factor adding to the distinctiveness of the case is the tribunal’s analysis of Andean Community law, which played a role in the tribunal’s determination that OEPC was entitled to a refund. See id., paras. 146–52.

27 Id., para. 163.

28 To the contrary, despite the finding of liability, various statements in the Award suggest that the tribunal favorably viewed Ecuador’s regulatory efforts. See id. (noting “the decisions taken by SRI do not appear to have been founded on prejudice or preference rather than on reason or fact”); id., para. 177 (noting that the treatment of OEPC “has not been done with the intent of discriminating against foreign-owned companies” and that “SRI is a very professional service that did what it thought was its obligation to do under the law”).

29 This standard may not be dissimilar from the void for vagueness doctrine in U.S. administrative and tax law. The author is grateful to Professors Kristin Hickman and Gregg Polsky of the University of Minnesota for noting this resemblance.

30 On January 7, 2005, President Bush issued an executive order to establish a Presidential Advisory Panel on Federal Tax Reform. See Executive Order 13, 369, at <http://www.whitehouse.gov/news/releases/2005/01/>. The advisory panel’s report will be issued in September 2005. See <http://www.taxreformpanel.gov>.

31 Confining the reasoning of Occidental to the particular facts and law of the case may give this argument less force.

32 1 Oppenheim’s International Law 1278–79 (Jennings, Robert & Watts, Arthur eds., 9th ed. 1992)Google Scholar. But see Lauterpacht, Hersch, Restrictive Interpretation and the Principle of Effectiveness in the Interpretation of Treaties, 1949 Brit. Y.B. Int’l L. 48, 59–63 Google Scholar.

33 Compare Award, supra note 1, paras. 173, 175 (focusing on comparing exporters generally and rejecting comparisons between nationals and foreigners), with UN Conference on Trade & Development, National Treatment 1, 3, 8, UN Doc. UNCTAD/ITE/IIT/11 (Vol. IV) (2000) (noting the aim of national treatment is to subject foreign and domestic investors to the same competitive conditions in the host country market).

34 Pope & Talbott Inc. v. Canada, Merits, Phase 2, paras. 75, 78 (nafta Ch. 11 Arb. Trib. Apr. 10, 2001), at <http://ita.law.uvic.ca/documents/PopeandTalbot-Merit.pdf>, discussed in Gantz, David A., Case Report: Pope & Talbot, Inc. v. Canada, 97 AJIL 937 (2003)CrossRefGoogle Scholar; see also Myers, S.D., Inc. v. Canada, Partial Award, para. 245 (nafta Ch. 11 Arb. Trib. Nov. 13, 2000) (liability), at <http://ita.law.uvic.ca/documents/SDMeyers-1 stPartialAward.pdf>>Google Scholar, discussed in Brower, Charles H. II, Case Report: S.D. Myers, Inc. v. Canada, 98 AJIL 339 (2004)Google Scholar.

35 Organisation for Economic Co-operation and Development, National Treatment for Foreign-Controlled Enterprises 22 (1993); see also UNCTAD, supra note 32, at 33.

36 Ecuador had no specific animus to target and penalize foreign investors. Award, supra note 1, para. 177.

37 These figures, as of July 2005, are drawn from CIA World Factbook 2005: Ecuador, at <http://www.cia.gov/cia/publications/factbook/>; see also South America: Ecuador; More Investment Needed, Petroleum Economist, Sept. 2004, at 21, available in Lexis, News Library, Allnws File.

38 Award, supra note 1, para. 136. Although mining involves a nonrenewable resource, the vast majority of the other industries that qualify for VAT refunds are ones relating to renewable resources.

39 See supra note 19 and accompanying text.

40 Although treating these issues as separate may have led to a different result, the tribunal took the view, see supra note 24 and accompanying text, that a breach of fair and equitable treatment “automatically entails an absence of full protection and security.”

41 Metalclad found a breach of fair and equitable treatment caused by a lack of transparency where “all affected investors of another party” were not aware of “all relevant legal requirements for the purpose of initiating, completing, and successfully operating investments made, or intended to be made.” Metalclad Corp. v. Mexico (nafta Ch. 11 Arb. Trib. Aug. 30, 2000), 40 ILM 36, 47 (2001), discussed in Dodge, William S., Case Report: Mexico v. Metalclad Corporation, 95 AJIL 910 (2001)CrossRefGoogle Scholar.

42 Metalclad was set aside largely because the transparency standard was outside of nafta’s Chapter 11. Mexico v. Metalclad Corp., Reasons for Judgment, 2001 B.C.S.C. 664, at <http://www.courts.gov.bc.ca>.

43 See supra notes 20–25 and accompanying text; see also Award, supra note 1, paras. 183, 185 (suggesting that the “stability of the legal and business framework is thus an essential element of fair and equitable treatment” and citing Tecnicas Medioambientales Teemed v. Mexico to suggest that governments should “act in a consistent manner, free from ambiguity and totally transparendy in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments”).

44 Award, supra note 1, paras. 183–85.

45 This question is the one raised Joanna Page when she suggests that “rights available under [an investment treaty] may be wider, more effective, and, since no premium is payable, cheaper than [political-risk insurance].” See Page, Joanna, Political Risk Insurance: Is It Worth It? Transnat’l Disp. Mgmt., June 2005, at <http://www.transnational-dispute-management.com/news/tdm2-2005_4.pdf>Google Scholar.

46 Czech Republic v. CME Czech Republic B.V., Case No. T 8735-01 (Svea Ct. App. May 15, 2003) (Swed.), at <http://ita.law.uvic.ca/documents/CME2003-SveaCourtofAppeal_000.pdf>.

47 See Argentina Government Rejects Utilities World Bank Tribunal Claims (Oct. 18, 2004) at <http://www.noticias.info/Archivo/2004/200410/20041018/20041018_36590.shtm>.

48 See Kerr, Juliette, Ecuador’s Procurator-General Says Most Oil Companies Violated Contracts , World Market’s Analysis, Sept. 22, 2004, available in Lexis, News Library, Allnws File Google Scholar.

49 See Oxy Faces Ecuador Trouble, Int’l Oil Daily, Aug. 24, 2004, available in Lexis, News Library, Allnws File Google Scholar; Kerr, Juliette, Petroecuador Files Complaint Against Occidental for Breach of Contract , World Markets Analysis, Sept. 17, 2004, available in Lexis, News Library, Allnws File Google Scholar.

50 Luca, Kintto, America’s Social Reform: Debate Grows over Trade Tribunal Rulings , IPS-Inter Press Service/Global Information Network, July 29, 2004, available in Lexis, News Library, Allnws File Google Scholar; Investment Disputes Jeopardize Free Trade Deal, Bus. News Am., Oct. 7, 2004, available in Lexis, News Library, Allnws File Google Scholar.

51 U.S. Agency for International Development, Ecuador: USAID Program Profile, at <http://www.usaid.gov/locations/latin_america_caribbean/country/ecuador/>; see also Chetwynd, Gareth, Oxy Rows with Quito, Upstream, Oct. 1, 2004 Google Scholar, available in Westlaw, ALLNEWS database.