Time To Hit Ecuador With Tariffs For Its Bad Faith Toward Chevron

Forbes - Michael I. Krauss 21/11/2018

Over 25 years ago, Texaco Petroleum  (“TexPet”) operated a consortium along with an Ecuadorian state-owned company, Petroecuador. In connection with its exit from that country in 1992, TexPet entered into a number of Settlement-and-Release Agreements with the government of Ecuador, under which the government agreed to release TexPet from all liability for various environmental claims in exchange for TexPet’s remediation of the area. TexPet funded the remediation, which the government of Ecuador supervised and confirmed in a 1998 release agreement. [Petroecuador continued, however, to operate and exploit the area, likely causing the environmental troubles that remain.] Notwithstanding these agreements, in May 2003 a group of individuals in Lago Agrio, Ecuador, sued Chevron (the acquirer of TexPet) for damage allegedly caused by TexPet.

Counsel for the Lago Agrio Plaintiffs embarked on a litigation strategy that included corrupting judges and court-appointed experts, paying bribes, falsifying evidence and forging signatures in order to procure a $18 Billion judgment against Chevron (which an Ecuadorian appellate court reduced to US$ 9.5 billion). I have discussed this sorry saga in numerous previous columns.

To enforce its rights under the Settlement-and-Release Agreements, Chevron filed an arbitration claim under the U.S.-Ecuador Bilateral Investment Treaty in September 2009 against the Republic of Ecuador. The arbitration, in The Hague,  is administered by the Permanent Court of Arbitration. Chevron alleged, inter alia, that Ecuador committed a denial of justice against Chevron through the fraudulent proceedings in Ecuadorian courts.

All this affects Ecuador's trading status with the United States through the  Generalized System of Preferences (“GSP”). GSP is a U.S. trade program that eliminates duties on products imported from designated beneficiary countries. Ecuador is the eighth largest beneficiary under the GSP.  To maintain its eligibility, beneficiaries must “act in good faith in recognizing as binding or enforcing arbitral awards in favor of United States citizens or [corporations].” In 2012, the United States suspended Argentina’s eligibility after the United States found that Argentina had failed to enforce arbitral awards in favor of two U.S. companies. Argentina’s GSP status was restored in January 2018 after Argentina resolved the outstanding disputes.

On October 2, 2012, Chevron petitioned to have Ecuador’s GSP designation suspended or withdrawn due to that country's failure to comply with numerous arbitral awards issued following the corrupt Lago Agrio Judgment. The GSP Subcommittee held hearings on Chevron’s petition in January 2016 and September 2017 and recently announced that it will hold a third public hearing on November 29, 2018.

Ecuador has flouted its GSP obligations towards Chevron from the get-go, but at the November hearing Chevron will present the best evidence yet of Ecuador's perfidy.

• On January 25, 2012, the arbitral Tribunal issued its First Interim Award, in which it ordered Ecuador to “take all measures at its disposal to suspend or cause to be suspended the enforcement or recognition within and without Ecuador of any judgment against Chevron in the Lago Agrio Case.”
• On February 16, 2012, the Tribunal issued its Second Interim Award, again ordering Ecuador to take “all measures necessary” to suspend recognition and enforcement of the Lago Agrio Judgment.
• Ecuador took no measures to comply with either the First or Second Interim Awards.  Instead, on August 3, 2012, Ecuador rendered the Lago Agrio Judgment final, enforceable, and subject to execution within Ecuador.  Shortly thereafter, the same attorneys who secured the Lago Agrio Judgment commenced enforcement actions against Chevron’s assets in Canada, Brazil, and Argentina.
• On February 7, 2013, the Tribunal issued its Fourth Interim Award,[1] declaring that Ecuador had violated the First and Second Interim Awards by failing to “take all measures necessary to suspend or cause to be suspended” the enforcement and recognition of the Lago Agrio Judgment against Chevron.
• From 2013-2018, Ecuador refused to take any steps to comply with the Tribunal’s Interim Awards.  To the contrary, Ecuador publicly supported enforcement efforts in Argentina and Brazil, which failed as those countries invoked the corrupt nature of the Judgment.
• On August 31, 2018, the Tribunal issued its decisive Track II Award.  This was no longer an interim award, but an award on the merits.  The Track II Award found “overwhelming” evidence that the Lago Agrio Judgment was fraudulent and corrupt and that it should not be enforced anywhere in the world.  “Short of a signed confession,” the Tribunal found the evidence before it to “be the most thorough  documentary, video, and testimonial proof of fraud ever put before an arbitral tribunal.”  The Tribunal held that “by issuing, rendering enforceable . . . , and knowingly facilitating [the Lago Agrio Judgment’s] enforcement,” Ecuador “committed a denial of justice” against Chevron under both the investment treaty and customary international law.  The Tribunal again ordered Ecuador to take “immediate steps” to “remove the status of enforceability from the Lago Agrio Judgment.”
• Ecuador has pronounced that its “fundamental” goal is to “avoid” enforcement of the Track II Award and has continued to align itself publicly with the Lago Agrio Plaintiffs’  lawyers’ efforts to enforce the Judgment, including working closely with Pablo Fajardo, the same attorney the Tribunal found had engaged in acts of corruption.

U.S. law prevents a country that ignores arbitral awards in favor of U.S. companies from benefiting from U.S. trade preferences under the GSP program.  On November 29, the GSP subcommittee will have the opportunity to enforce U.S. law.  Here's hoping it does so.