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Breach of BIT obligation to provide effective means of asserting claim
Practical Law UK Legal Update Case Report 3-501-9494 (Approx. 4 pages)
Breach of BIT obligation to provide effective means of asserting claim
by PLC Arbitration
| Law stated as at 07 Apr 2010 • International, USA (National/Federal) |
An update on Chevron Corporation (USA) and Texaco Petroleum Company (USA) v The Republic of Ecuador (UNCITRAL arbitration): Partial Award on the Merits of 30 March 2010, which considered whether Ecuador breached its obligation to provide the claimants with an effective means of asserting their claims and enforcing their rights.
Speedread
In Chevron Corporation (USA) and Texaco Petroleum Company (USA) v The Republic of Ecuador (UNCITRAL arbitration), the claimants, two US companies, sought damages for breach of the US-Ecuador bilateral investment treaty (BIT) and their investment agreements (oil concessions) in connection with undue delay in seven court cases, initiated by one of the claimants, Texaco, against Ecuador before the Ecuadorian courts.
The claimants were successful on the merits. The tribunal found that Ecuador breached its obligation to provide the claimants with an effective means of asserting their claims and enforcing their rights under article II(7) of the BIT by undue delays in all seven court cases before Ecuadorian courts. The tribunal will now proceed to the quantum phase.
The decision clarifies the rare investment treaty standard concerning the obligation of the host state to provide the investor with an effective means of asserting claims and enforcing rights, treating it as an independent treaty standard constituting a lex specialis of the denial of justice under customary international law.
Background
Article II(7) of the US–Ecuador Bilateral Investment Treaty (the BIT) provides:
"Each Party shall provide effective means of asserting claims and enforcing rights with respect to investment, investment agreements, and investment authorizations."
For details of obligations placed on host nations generally, see Practice note, Investment treaty arbitration, legal issues.
Facts
The underlying dispute was based on the BIT and related to undue delay in seven cases initiated by one of the claimants, Texaco, against Ecuador in the Ecuadorian courts in connection with oil concessions in Ecuador. Texaco was a wholly owned subsidiary of Chevron, acquired after Texaco's conflict with the Ecuadorian government arose.
The claimants sought damages for the following breaches allegedly committed by Ecuador:
- Breach of article II(7) of the BIT and other BIT obligations.
- Denial of justice under customary international law by undue delay or manifestly unjust decisions.
- Breach of certain investment agreements between Ecuador and Texaco.
Decision
The tribunal found that Ecuador breached its obligations under Article II(7) of the BIT and was liable for damages. As no additional damages were claimed in connection with other alleged breaches of the BIT and the customary international law, the tribunal did not analyse the other claims.
With regard to the breach of Article II(7) of the BIT, the tribunal found that:
- Article II(7) expressed an independent treaty standard of "effective means" and was not a mere restatement of the denial of justice. This effective means standard was characterised by greater specificity than the customary international law standard of denial of justice. Therefore, it was a lex specialis of the denial of justice. Violation of the effective means standard did not automatically constitute the denial of justice under customary international law.
- A breach of article II(7) would arise where the domestic courts failed to enforce rights "effectively", unlike the potentially more demanding test for the denial of justice, which required the demonstration of "a particularly serious shortcoming" and egregious conduct that "shocks, or at least surprises, a sense of judicial propriety".
- Article II(7) expressed the positive obligation of the host state to provide an effective means of asserting claims and enforcing rights. The article could be breached even if there was no evidence of interference of the host state with the judicial system.
- Applying article II(7), the tribunal could examine the individual cases but did not act as a court of appeal reviewing the cases de novo.
- In the present case, compliance with the effective means standard depended on the claimants' recourse to the Ecuadorian courts, which would grant them enforcement of their rights within a reasonable amount of time. The requirement of reasonableness was analysed by the tribunal taking into consideration the complexity of the case, the behaviour of the litigants and of the domestic courts and the significance of the interests at stake in the case.
- In the present case, the delay in all seven court cases was unreasonable by the time the arbitration had commenced. At that time, the cases had already been pending for at least 13 years and neither their complexity nor the claimants' behaviour justified such a delay. There were long delays even after the courts officially acknowledged they were ready to decide the cases. The nature of the delay and the apparent unwillingness of the Ecuadorian courts to resolve the disputes made the delay undue and constituted a breach of the BIT.
- Any decision rendered by the domestic courts after the date of the BIT breach caused by the delay did not affect the host state's liability but could affect the issues of causation and damages following from the breach.
- Court congestion and backlogs did not justify long delays. They should have been temporary and promptly and effectively addressed by the host state; otherwise they constituted a breach of article II(7) of the BIT.
Exhaustion of local remedies
As part of the obligation to provide effective means of asserting claims and enforcing rights, the tribunal analysed the requirement to exhaust local remedies. The tribunal found:
- A qualified requirement of exhaustion of local remedies applies to article II(7) of the BIT. Strict exhaustion of local remedies is not necessary, but the claimants were required to make use of all remedies available in Ecuador that might have rectified the wrongs they complained of. This also applied in cases where the main complaint was delay, as the claimants' behaviour before domestic courts might have contributed to the delay and should also be analysed by the tribunal.
- The respondent state was obliged to prove that the remedies existed, whereas the claimants were obliged to prove that these remedies were ineffective, futile or that resort to them was unsuccessful.
- In the present case, the remedies referred to by Ecuador would not have remedied the ineffectiveness of the system (that is, court delays) and therefore, did not have to be exhausted under Article II(7) of the BIT.
The tribunal will now proceed to the quantum phase.
Comment
The decision clarifies the rare investment treaty standard concerning obligation of the host state to provide the investor with effective means of asserting claims and enforcing rights, treating it as an independent treaty standard constituting a lex specialis of the denial of justice under customary international law.
The tribunal also clarified that the reliance on this treaty obligation by the claimants required them to exhaust any local remedies which could resolve the systemic inefficiencies alleged by the claimants. However, the burden of proof as to the existence of such effective remedies was on the respondent state.