Ecuador: Ecuadorian Request To Annul An Icsid Award Is Denied.

Last Updated: 7 February 2007
Article by Hernán Pérez Loose

Background:

1. On June 17, 2004, the Empresa Estatal Petróleos del Ecuador (PETROECUADOR), a corporation fully owned by the Government of Ecuador, filed with the ICSID Secretariat a request to annul the February 20, 2004 arbitral award (ARB/01/10) rendered in an arbitral proceeding where PETROECUADOR and REPSOL, YPF Ecuador S. A. (REPSOL) had been parties to.

2. The original controversy between the parties arose when the Government of Ecuador asked REPSOL to start negotiations to change the service contract under which it operated for a share-production agreement. In the process of liquidating the old contract ("First Contract"), however, both parties disagreed over some accounts. In the amended contract ("Second Contract") the parties agreed to follow a procedure in order to solve the pending dispute, which eventually included the appointment of an expert. The disagreements, however, continued and the matter was eventually brought to arbitration under the ICSID.

3. On February 20, 2004, an ICSID tribunal, which included two Ecuadorian attorneys, ruled in favour of REPSOL. The tribunal ordered PETROECUADOR to pay US$13,684,279.23.

The nullity proceeding

4. The main contention of PETROECUADOR before the ad hoc Committee (Messrs. Judd Kessler, Piero Bernardini and Gonzalo Biggs) was that the award was null and void because the tribunal had exceeded its powers (Art. 52 (b) of the International Convention for the Settlement of Investment Disputes between States and National of other States, "the Convention"). According to PETROECUADOR, the tribunal exceeded its powers for the following reasons:

  1. The award was rendered as if the dispute had arisen from the Second Contract when, in PETROECUADOR’s view, the dispute arose from the First Contract.
  2. The tribunal did not have competence to rule upon the dispute since the controversy between the parties had already been settled by the Dirección Nacional de Hidrocarburos (DNH) (National Hydrocarbons Board), its ruling being, according to PETROECUADOR, one that had the force of "administrative res judicata".
  3. Even if the dispute was to be settled under the Second Contract, the Tribunal, according to PETROECUADOR, exceeded its powers when ordered the payment of "an inexistent and not liquidated debt" since certain parameters mentioned in the Second Contract for the liquidation of the debt were still undetermined.
  4. REPSOL did not have the proper authorization from YPF to file the request for arbitration.
  5. The tribunal did no apply the laws of Ecuador in violation of Art. 42(a) of the Convention.

5. In answer to PETROECUADOR’s position, REPSOL urged the Tribunal to dismiss the request for annulment because:

  1. The original controversy was not about which of the two contracts had to be applied, but rather about PETROECUADOR’s lack of payment despite its contractual commitment under the Second Contract.
  2. PETROECUADOR’s allegation of lack of competence was already decided in the decision on jurisdiction of the original proceeding.
  3. The DNH’s resolution was not subject to an appeal because the controversy was of contractual origin rather than administrative in nature; a characterization endorsed even by the Attorney General.
  4. The amount due by PETROECUADOR was fixed in REPSOL’s complaint and it would have been improper for the Tribunal to review the liquidation of a debt that had been the matter of a prior and already settled controversy.
  5. REPSOL was fully authorized by the other member of the consortium to commence arbitration.
  6. The annulment of an award is a very restrictive proceeding which deals with the legitimacy of the award and therefore the grounds for annulment are to be interpreted very narrowly. Moreover, the nullity due to an excess of powers had to be notorious and self-evident, otherwise the proceeding becomes an appeal.
  7. Even if the Tribunal had misapplied Ecuadorian law, this in itself does not constitute a ground for annulment according to Wena Hotels v Egypt. (41 ILM 933. 2002)

The ruling

6. By unanimity the ad hoc Committee found for REPSOL. With regard to the contention of PETROECUADOR that the Tribunal had exceeded its powers, the Committee said:

  1. For the excess of powers of a Tribunal to be a valid ground to annul an award, it had to be "manifest". Excess of powers is generally understood as "manifest" when it is "evident" from the sole reading of the award, that is, even before examining its content in detail. On this issue, the Tribunal relied on the Wena decision and the comments of Prof. Schreuer (The ICSID Convention. A Commentary. 2001. p. 933). The Tribunal added that from a first reading, the decision on jurisdiction handed by the Tribunal in January of 2003 is clear, convincing, well reasoned and free of contradictions. Moreover, the Committee noted, the norms of the Ecuadorian legal system were taken into consideration and applied by authoritative and experienced arbitrators, two of whom were of Ecuadorian nationality.
  2. Even assuming that the Tribunal had wrongly applied the laws of Ecuador, it is to be remembered that under the ICSID system of annulment of awards, mistakes made in the application of a law --- in contrast with its lack of application (or of other rules agreed by the parties) --- do not justify, according to Art. 42 of the Convention, to the annulment of an award. Previous decisions confirm the relevance of this distinction in the context of a proceeding initiated to annul an award, keeping in mind that this type of proceeding shall not be confused with an appeal which is not available under Art. 53 of the Convention. The Committee cited some decisions to support its conclusion (Klöckner v. Cameroon ARB/81/2. ICSID Reports, Vol. 2, 1994. p. 95; Amco v. Indonesia ARB/81/1.ICSID Reports, Vol. I, 1193, p.515-6; MINE v.Republic of Guinea ARB/84/4. 5 ICSID Review- FILJ 65 (1990)
  3. This is why, according to the ad hoc Committee, PETROECUADOR erred when it said at the hearing that the Tribunal had exceeded "… in its attributions because it has given an extensive interpretation to these Ecuadorian norms, legal rules which are part of [Ecuadorian] public law ".
  4. No matter which contract (the First or the Second) is the one that rules the controversy, both parties agreed to submit all controversies to ICSID arbitration. By virtue of the agreement, the jurisdiction of ICSID and the competence of the ICSID Tribunal cannot be challenged if, as in this case, all the additional requirements of Art. 25 of the Convention have been met. Therefore, the ICSID jurisdiction and the competence of the Tribunal are not going to be discarded by an objection that the matter of the controversy was related with an administrative act with effects of res judicata.
  5. Even when the excess of powers is analyzed under a larger perspective, the award resists any criticism under this concept. In fact, the Tribunal did not rule on issues that were not brought to its attention, neither did it omit to rule on those matters that were submitted by the parties, nor did it refuse to apply the law chosen by the parties.

7. Then the Committee addressed PETROECUADOR’s argument that the Tribunal had exceeded its powers "manifestly" because in its award it (i) ruled that the obligations of PETROECUADOR did not arise from the First Contract but from the Second one, and (ii) did not recognize the legal effects of a decision adopted by the DNH, which had not been challenged by REPSOL and therefore, according to PETROECUACOR, had the status of res judicata.

8. The Committee did not find that the Tribunal had exceeded its powers by the reasons alleged by PETROECUADOR. The Committee noted that there was ample evidence in the record that the controversy arose after the refusal of PETROECUADOR to comply with its obligation to pay REPSOL the monies due to it after the liquidation of the First Contract; obligation that PETROECUADOR assumed expressly in the Second Contract. While the Committee acknowledged that the disputes between the parties arose during the execution of the First Contract, it also stressed the fact that that contract was put to an end by PETROECUADOR’s own initiative and replaced by the Second Contract which became the law of the parties. Even if this conclusion were erroneous, this does not avail the annulment of the award.

9. With regard to PETROECUADOR’s contention that the decision of DNH constituted an administrative res judicata and that it was therefore immune from any subsequent review, the Committee found (i) that the decision of DNH was adopted after the parties had liquidated the First Contract following the procedures they had agreed upon, (ii) that the powers of DNH, entrusted by the Hydrocarbon Law, to review the liquidation of accounts after the expiration of oil contracts have certain limits imposed by the Constitution and other applicable laws, as well as the circumstances of each case, (iii) that in this case the fact that PETROECUADOR and REPSOL had expressly agreed in the Second Contract to follow a particular procedure to liquidate the old accounts prevented the DNH --- which was not a party to that contract --- to modify unilaterally that contractual arrangement. The Committee said that a reading of the sections of the award devoted to this issue reveals that the Tribunal gave thorough consideration to the Hydrocarbon Law and related statutes of Ecuador. Moreover, according to the Committee, a prima facie analysis of the award does not suggest that in its unanimous decision the Tribunal had failed to apply Ecuadorian law to the dispute. The Committee notes again that it has no authority to annul the award under the basis of a "mere error in the application of the law, but only when the pertinent law has not been applied." (iv) that PETROECUADOR did not rise any objection as to the validity of the procedure that both parties had agreed to follow in order to settle the disputed accounts; a procedure which eventually included the binding opinion of an expert selected by both parties and that had received the approval of the Attorney General. It was only at a later stage, when the expert rendered its opinion, when PETROECUADOR and the Attorney General himself began to question the legality of the previously agreed procedure and to argue that the DNH, not the expert chosen by the parties, had the power to make such determination; (v) that the Tribunal found that both parties eventually agreed to solve their dispute through an ICSID arbitration. This decision to arbitrate made PETROECUADOR’s argument futile that the Tribunal was bound by the ruling of the DNH and its alleged res judicata effect.

10. The Committee dismissed also the argument of PETROECUADOR that the Tribunal had exceeded its powers in rendering the award because REPSOL did not have the authority to represent the other companies of the consortium. The Committee noted the lack of evidence to support this argument and the fact that the companies did ratify the actions adopted by REPSOL. The Committee underlined again that its role is not that of an appeal tribunal and that the Convention authorizes the Committee to annul awards only when they contain manifest mistakes of such gravity that they may shed some doubts about the legitimacy of the proceedings. It also observed that PETROECUADOR’s arguments before the Committee were in essence the same than the ones it brought before the Tribunal when it dealt both with its jurisdiction and the merit of the case.

11. The Committee reminded PETROECUADOR that the procedures to annul an award "should not be followed routinely or as mean to delay (…) the enforcement of an award". In light of its reluctance to pay promptly the costs incurred during the proceedings, the Committee ordered PETROECUADOR to bear the full amount of such cost plus half of the legal fees of REPSOL’s counsel.

COMMENTS.

The ruling is a welcome development in the growing jurisprudence of ICSID arbitration on annulment of awards. As established by the Convention, the annulment of an arbitral award is an extraordinary decision taken under exceptional circumstances. As stressed by the Committee in this case, it is a proceeding that is often confused with an appeal. The ruling of the Committee send a strong message to losing parties that may see in the annulment process just another way to delay compliance with an adverse decision.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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