Ecuador has been partially relieved of its debt to Occidental in an annulment of the largest investor-state award ever.
Back in 2012, an arbitral tribunal at ICSID (the World Bank arbitration facility) ordered Ecuador to pay Occidental nearly $1.8 billion for the country’s natural resource policy changes. This was the largest award ever for an investment treaty claim,* as I noted at the time. This amounted to several percentage points of the country’s national income, and 79 times greater that US foreign aid to the developing nation. Ecuador immediately applied for annulment of the tribunal’s decision.
A bit of background: when a company brings an investor-state lawsuit, the case is decided in the first instance by a panel of three arbitrators. Typically, the investor appoints one, the state a second, and the two arbitrators (or litigants) agree on a third. In contrast, annulment committees are appointed by the World Bank president – who is currently Jim Yong Kim, an Obama appointee. In theory, this second level is more subject to state control – as state appointees run the World Bank. In practice, annulment is a very limited form of appeal that has only been successfully invoked by states a handful of times over hundreds of cases.
Today, the annulment committee sided with part of Ecuador’s appeal. Specifically, they aligned themselves with a dissenting opinion by Brigitte Stern – the state-appointed arbitrator in the original tribunal. As Luke Eric Peterson at IAReporter.Com notes, Stern’s dissenting opinion was so specifically laid out that it virtually constituted a roadmap for how to annul the case.
On the one hand, the ruling is by far the most economically and substantive annulment action in ICSID history. It also shows that dissents matter. Even when states don’t win a case, today’s decision shows that convincing even one of the three arbitrators on even part of the sovereign defenses – and then getting that arbitrator to dissent – can matter for case outcomes.
On the other, the annulment committee was careful to leave most of the tribunal’s award intact. Today’s decision reduced the damages owed by Ecuador to a bit over $1 billion – or a third of Occidental’s original $3 billion request. That still constitutes over a percentage point of Ecuador’s 2012 GDP.
More importantly, the tribunal did not side with any of Ecuador’s broader political and economic arguments about its national sovereignty. Indeed, the tribunal maintained that Ecuador had done nearly $2 billion in damage, but that Occidental wasn’t owed all of it. As today’s decision read,
Occidental “had transferred 40% of its interest to a third party, initially the Bermudan company AEC, which thereafter sold it to the Chinese company Andes”…
The extent and scope of Claimants’ investments is more than a purely legal issue, relevant only for the calculation of damages in this case. It has wider repercussions, touching on the natural tension between general principles of equality and equity vis-à-vis the jurisdictional scope of ICSID arbitration. This tension is inbuilt in a legal system which only protects investments held by investors of a certain nationality, covered by a specific BIT, but denies protection to other investors, including domestic investors.
(As I wrote here, the jurisdiction of investment tribunals are not as narrow as this quote suggests. Nonetheless, it is undeniable that a tribunal should not be awarding damages to parties not involved in the litigation in question – and especially not awarding their damages to the claimant.)
Indeed, today’s decision is arguably a very pro-investor decision, in two ways.
First, the original tribunal unanimously declared that Ecuador’s “administrative goal[s] must be balanced against the Claimants’ own interests”. While such so-called proportionality analysis has precedent in legal systems, this was the most significant application of it to investment arbitration. It effectively declares that governments must always be on the lookout to make regulations less onerous on foreign investors. Today’s decision reads:
Ecuador … argues that the Tribunal has manifestly exceeded its powers because the principle of proportionality is allegedly not encompassed in the Participation Contract, Ecuadorian law, or in customary international law.
The argument cannot succeed, because the standard for annulment in allegations of misapplication or misinterpretation of law applicable to the merits is especially high: only exceptionally gross or egregious errors of law could be construed to amount to a failure to apply the proper law to the merits, and could give rise to the possibility of annulment. The Tribunal has not committed any gross or egregious error of law.
In other words, the committee will not second-guess a tribunal’s re-visioning of the very content of investment treaties.
So annulment committees are supposed to be modest…
…Except when they choose not to be.
Second, annulment is meant to be a blunt instrument. Annulment committees can vote up or down on the whole award of the original tribunal. They can vote up or down on specific paragraphs. They have not traditionally been willing to revisit the merits of decisions, or edit and revise specific tribunal conclusions. Under that old paradigm, the annulment committee would have ix-nayed a specific paragraph on damages, and the investor would have had to re-litigate the whole case to get a second tribunal to insert a new amount of damages. Today’s annulment committee struck out in a pro-investor direction by saving them from this step, and simply inserting in a revised damage calculation:
The next question to be addressed is whether the Committee is authorized to substitute the annulled figure of damages with the correct number, or whether this task must be entrusted to a new investment tribunal. The parties have discussed this issue, and while Respondent favours the constitution of a new tribunal, Claimants have accepted that in the proper circumstances annulment committees are authorized to insert correct data in partially annulled decisions.
The Committee concurs with Claimants.
It is true that annulment committees are not empowered to amend or replace awards. But this is not the task at hand. What is required in this case, in which the Committee is partially annulling the Award, is for the Annulment Committee to substitute the Tribunal’s figure of damages with the correct one. If this task can be performed without further submissions from the Parties and without additional marshalling of evidence, committees should be entitled to do so. Basic reasons of procedural economy speak in favour of this solution. There is no need for the parties to incur the additional cost and delay of going through a second investment arbitration, when the correct number can be inserted by the annulment committee, after performing a very simple arithmetic calculation and without further input from the parties.
In short, from a quick reading of the annulment committee decision and Stern’s original dissenting opinion, today’s events are not so much a statist remaking of investment arbitration. Instead, they constitute a pretty legalistic and conservative application of property rights by a state appointee dissenter. This was in turn adopted by an annulment committee that was modest (as to the state’s further claims) and ambitious (as to the investor’s further claims).
Nonetheless, the decision is remarkable. Annulment almost never happens, so the mere occurrence is noteworthy – as it a dissent actually mattering in some way. Ecuador will breathe easier, to the tune of nearly $1 billion.
Read the annulment decision here. HT IAReporter.Com.
* Another case, Eureko v. Poland, reportedly produced a larger nominal state-to-investor payment – although this was in the form of a post-award settlement.