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April 1, 2013

Chevron Tribunal Declares Ecuador In Breach of Interim Awards

On February 7, 2013, an investment arbitration tribunal issued its third interim measures award in the Chevron vs. Ecuador case. The tribunal found Ecuador in breach of its previous award ordering Ecuador to take all measures necessary to prevent enforcement within or without Ecuador of a $19 billion environmental judgment against Chevron in an Ecuadorian court, pending adjudication of Chevrons arbitration claim that the judgment was procured by fraud and should therefore be nullified. The tribunal further ordered Ecuador to show cause why it should not compensate Chevron for any damages caused by its breach of the earlier award. The Chevron tribunals award continues a recent trend of tribunals taking more assertive steps to protect the status quoand their own jurisdictionduring the pendency of international investment arbitrations.

Chevron (represented by King & Spalding) filed its arbitration proceeding against Ecuador in September 2009, under the terms of that countrys bilateral investment treatyor BITwith the United States. It claimed, among other allegations, that the environmental case pending against Chevron in Lago Agrio, Ecuador was irreparably tainted by fraud and corruption on the parts of the plaintiffs lawyers and representatives, in collusion with the executive and judicial branches of the Ecuadorian State. According to Chevron, Ecuadors actions violate various BIT standards, including Ecuadors obligations to provide fair and equitable treatment and an effective means for U.S. investors to enforce their rights. On February 14, 2011, the Ecuadorian court nonetheless issued a $19 billion judgment against Chevron. In its arbitration against Ecuador, Chevron seeks compensation for Ecuadors violation of the BIT as well as nullification under international law of the Ecuadorian court judgment.

The merits phase of Chevrons treaty claim remains pending, but the plaintiffs in the underlying Ecuadorian court case nonetheless are in the process of seeking recognition and enforcement of the judgment in Ecuador, Argentina, Brazil, and Canada, with the promise of additional enforcement efforts in other jurisdictions. In anticipation of such efforts, shortly after filing its claim Chevron requested that the tribunal issue interim measures preventing enforcement of the judgment pending adjudication of the treaty case. Chevron has renewed and reframed its request on several occasions in light of ongoing developments in both the Ecuadorian and enforcement courts, and the arbitration tribunal has conducted five hearings over the course of the last three years at which the parties have debated Chevrons interim measures requests.

The Chevron tribunal issued a series of three escalating and increasingly targeted interim awards in an effort to preserve the status quo between the parties, as well as its own jurisdiction ultimately to decide the merits of Chevrons case against the $19 billion Ecuadorian court judgment. In its first award of February 9, 2011, the tribunal ordered Ecuador to take all measures at its disposal to suspend or cause to be suspended enforcement of any Ecuadorian court judgment within or without Ecuador, pending adjudication of Chevrons treaty case. After the Ecuadorian court issued its judgment, and in the face of Ecuadors argument that it had no measures at its disposal to prevent enforcement of that judgment, the tribunal issued a more strongly worded award on February 16, 2012. In that second award, the tribunal ordered Ecuador to take all measures necessary to suspend or cause to be suspended enforcement of the judgment within or without Ecuador. And most recently the tribunal issued its third award, declaring Ecuador in breach of the first two awards and indicating that Ecuador may be liable in damages for harm caused to Chevron as a result of that breach.

The tribunals third interim award followed several months of enforcement efforts by the Ecuadorian plaintiffs in Ecuadorian, Argentine, Brazilian, and Canadian courtsefforts that Chevron contends have damaged it in the form of attorneys fees and, in particular, an Argentine freezing order affecting a significant percentage of Chevrons Argentine subsidiarys assets. Chevron had argued that Ecuador breached the earlier awards by failing to pursue various means to cause these enforcement actions to be suspended, including revocation of the certification of finality of the Ecuadorian court judgment, and various executive actions available under Ecuadorian law.

The Chevron tribunals willingness to issue increasingly targeted and strong interim measures awards over a period of two years indicates, on the one hand, a cautious approach in exercising its jurisdiction pending its adjudication of the merits of the dispute. But it also indicates an ultimate willingness on the tribunals part, after giving Ecuador several opportunities to comply with its more general awards, to assert its jurisdiction by issuing more specific interim relief. The cautious but escalating approach taken by the Chevron tribunal could serve as a model for future arbitral tribunals attempting to maintain the status quo and protect their jurisdiction in contentious international investment disputes.