Dutch court upholds latest arbitral award in Lago Agrio matter

In a recent September 2020 decision, the District Court of The Hague rejected in full a setting aside claim instituted by the Republic of Ecuador against the merits arbitral award on liability rendered in favour of Chevron in an investment arbitration administered under the auspices of the Permanent Court of Arbitration (PCA) in The Hague. The award vindicated Chevron’s position in its investment dispute with Ecuador finding that the multibillion-dollar Lago Agrio judgment issued by the Ecuadorian courts was procured through fraud, bribery and corruption and based on environmental claims fully released by Ecuador years earlier. The underlying arbitration is now in its damages stage, in order to quantify the damages for which Ecuador is liable to Chevron.

The District Court’s ruling

Rejecting all of Ecuador’s setting aside arguments, the District Court dismissed Ecuador’s contention that the arbitral tribunal had failed to sufficiently state reasons for its denial of justice finding. The Court also found that the tribunal acted within its mandate in issuing the award and that the award, and the way in which it came about, did not violate public policy.

In coming to its decision, the District Court among other things rejected Ecuador’s argument that the arbitral tribunal’s award, including an order to remove the status of enforceability of the Lago Agrio judgment, lacked reasoning, exceeded the tribunal’s mandate and was contrary to Dutch public policy. The Court upheld the tribunal’s ruling and found that said order, and related orders, were reasonable in light of the evidence of egregious fraud and corruption on which the Lago Agrio judgment was based. Indeed, the Court recorded that the fraudulent nature of the Lago Agrio judgment was common ground between the parties and undisputed by Ecuador.

In that sense, the District Court also did not agree with Ecuador’s claim that the award improperly required Ecuador to prevent enforcement of the Lago Agrio judgment outside of Ecuador. Instead, the Court found that the arbitral tribunal’s orders validly required Ecuador to remove the status of enforceability of a corrupt judgment issued by Ecuadorian courts and take steps to ensure that the Lago Agrio plaintiffs and related parties do not enforce the judgment within or without Ecuador.

In the end, none of the setting aside grounds brought by Ecuador were successful and the Court dismissed Ecuador’s setting aside claims in full.

The Lago Agrio matter

In 2003, a group of 47 Ecuadorian plaintiffs brought an action against Chevron before the Lago Agrio courts in Ecuador for alleged environmental damage in the Oriente (Amazon) region. Chevron has never operated in Ecuador. TexPet, which became an indirect subsidiary of Chevron years later, was a minority participant in a consortium with the Ecuadorian state oil company Petroecuador between 1964 and 1992. Since 1992, the area was operated by Petroecuador alone. Ecuador subsequently released TexPet and Chevron of all environmental liabilities following completion of a comprehensive environmental remediation program supervised and approved by Ecuador. Nevertheless, in February 2011, a Lago Agrio court ordered Chevron to pay USD 18 billion in compensation for alleged environmental damage, including punitive damages (the total was later reduced to USD 9.5 billion after the punitive damages were quashed). Chevron subsequently launched appeal proceedings, also based on evidence of fraud and corruption during the coming about of the first instance Lago Agrio judgment. However, that judgment was eventually upheld by both the Ecuadorian Supreme Court in 2013 and the Ecuadorian Constitutional Court in 2018.

The arbitral proceedings

Chevron initiated arbitral proceedings against Ecuador under the US-Ecuador bilateral investment treaty (BIT) as a result of Ecuador’s violation of its rights under the BIT. In the award on liability which Ecuador sought to set aside, the tribunal found that the USD 9.5 billion judgment rendered against Chevron was obtained through fraud, bribery and corruption and regarded claims that Ecuador had released Chevron and TexPet from years before. The tribunal has also concluded that Ecuador had committed a denial of justice and breached its international law obligations under the BIT.

The tribunal’s findings of fraud and corruption were virtually identical to findings made by U.S. federal courts years earlier.

Conclusion

The District Court’s decision constitutes the latest chapter in a decade-long saga between Chevron and Ecuador involving both complex arbitral and court proceedings. In the meantime, the Lago Agrio plaintiffs sought the enforcement of the fraudulent Lago Agrio judgment in Argentina, Brazil and Canada, but all of those attempts failed.

The award on liability represented the culmination of the second track of the arbitration. The proceedings to quantify the damages owed by Ecuador to Chevron are still ongoing as part of a third track of the arbitration.

The original Dutch District Court judgment is available here. An English translation of the judgment has been made available here.

Linklaters acts as lead counsel for Chevron in the setting aside proceedings before the Dutch courts.