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Arbitral award obligating Ecuador to prevent enforcement of USD 8.6 billion order does not violate public order

Arbitral award obligating Ecuador to prevent enforcement of USD 8.6 b

Arbitral award obligating Ecuador to prevent enforcement of USD 8.6 billion order does not violate public order

01.05.2019 NL law

Due to environmental damage as a result of oil extraction in the Ecuadorian Amazon, oil company Chevron was ordered to pay USD 8.6 billion to Ecuadorian citizens. In order to claim release of liability, Chevron and Texaco initiated arbitration proceedings against Ecuador. Arbitral awards ordered Ecuador to prevent enforcement of the Ecuadorian judgment, leaving the Ecuadorian plaintiffs temporarily unable to enforce their judgment. According to the Supreme Court (12 April 2019, ECLI:NL:HR:2019:565), these arbitral awards did however not violate public order.

Facts

Between 1964 and 1992, Texaco Petroleum (''TexPet'') carried out oil extraction activities in the Ecuadorian Amazon region. This led to environmental pollution in this area. Consequently, Ecuadorian residents claimed damages from TexPet in 1993.

Ecuador, TexPet and PetroEcuador – Ecuador's state-owned company that continued the oil extraction after 1992 – subsequently entered into a settlement agreement in which Ecuador released TexPet and all its successors, predecessors, principals and subsidiaries of claims for environmental impact arising from the oil extraction.

In 2003, Ecuadorian citizens initiated a class action lawsuit against Chevron Corporation (TexPet's indirect shareholder) to claim damages resulting from the environmental pollution by TexPet (these proceedings are also referred to as the ''Lago Agrio Case''). The Ecuadorian Court of Appeal ordered Chevron to pay USD 8.6 billion to the Ecuadorian plaintiffs.

In 2009, Chevron and TexPet initiated arbitration proceedings before the Permanent Court of Arbitration in The Hague under the bilateral investment treaty (BIT) between Ecuador and the United States of America. These proceedings primarily concern the question of who is liable for the environmental pollution in Ecuador: Chevron and TexPet, or Ecuador.

The arbitral tribunal ordered multiple Interim Awards that obligated Ecuador to take measures to suspend the enforcement and recognition, both within Ecuador and abroad, of any judgment in the Lagro Agrio Case until any further order or award was made by the arbitral tribunal.

The tribunal also determined that Chevron and TexPet would be responsible towards Ecuador for any costs or losses which Ecuador may suffer in performing its legal obligations under the Interim Awards. Chevron and TexPet were obligated to deposit USD 50 million as a security for this responsibility. In the First Partial Award, the tribunal ruled that Chevron and TexPet can fully invoke the release of claims as agreed in the settlement agreement.

Proceedings

In this case, Ecuador seeks – inter alia – annulment of the Interim Awards. Ecuador argued that these awards violate public policy, namely Article 6 of the European Convention on Human Rights (ECHR), the right to a fair trial, as the plaintiffs in the Lago Agrio Case would – as a result of arbitration proceedings in which they are not involved – be unable to enforce their judgment against Chevron within a reasonable period of time.

The competent court, the District Court in The Hague, rejected Ecuador's claims. The Court of Appeal confirmed this verdict. In short, the Court of Appeal ruled that the interim awards have a temporary nature and that they are intended to prevent an irreversible situation; specifically the situation whereby Chevron and TexPet would pay damages to the Ecuadorian citizens and run the risk of not being able to have recourse against Ecuador.

Supreme Court judgment

On 12 April 2019, the Supreme Court confirmed the Court of Appeal's decision. It ruled that, under Dutch arbitration law, interim awards of arbitral tribunals can be subject to an annulment claim if this claim is filed together with a claim to annul a (full or partial) final award.

According to the Supreme Court, the annulment of arbitral awards on the basis of violation of public order (in accordance with Article 1065 (1)(e) of the Dutch Code of Civil Procedure) should be used with caution. This possibility of annulment cannot be used as a disguised appeal, and regular courts may only intervene in obvious situations, in the view of an effective functioning of arbitration proceedings. For annulling arbitral awards in breach of public policy, it is necessary that the awards are violating mandatory law of such a fundamental character that compliance cannot be prevented by procedural issues. The Supreme Court ruled that the reasonable period of time in which judgments should be enforced in accordance with Article 6 ECHR depends on all the circumstances of the case.

The Supreme Court confirmed the Court of Appeal's verdict. It concluded that the interim awards do not violate public policy. The interim awards affect the rights of the plaintiffs in the Lago Agro Case, who are not involved in the arbitration proceedings between Chevron, TexPet and Ecuador. As the awards only affected the plaintiffs' rights to execute their judgment temporarily, and not definitely, the awards do not violate public order.

This ruling confirms the current doctrine in case law that Article 1065 (1)(e) of the Dutch Code of Civil Procedure needs to be applied restrictively. This judgment of the Supreme Court adds to this that even if an arbitral award temporarily may deprive third parties of their right to execute a judgment, this award does not violate public order.

On 30 August 2018, the Permanent Court of Arbitration ruled mainly in favour of Chevron. It is possible that Ecuador will claim annulment of that award as well.

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