Burlington Resources Inc v Ecuador, Decision on counterclaims: case analysis
Related developments:
On 11 August 2015, the tribunal in a parallel arbitration (*Perenco Ecuador Limited v. Republic of Ecuador, ICSID Case No. ARB/08/6*) initiated by the consortium partner of Burlington Resources Inc (“Burlington”), Perenco Ecuador Limited (“Perenco”), issued its Interim Decision on the Environmental Counterclaim (the “Perenco Decision”) (*Perenco Ecuador Limited v. Republic of Ecuador, ICSID Case No. ARB/08/6, Interim Decision on the Environmental Counterclaim, 11 August 2015*).
Lacking the Parties’ agreement to take into account the Perenco Decision, the Tribunal decided not to coordinate with the tribunal in the parallel proceeding.
Core issue(s):
1. Whether, absent the parties’ agreement, the tribunal must take into account the decisions of an arbitral tribunal in a parallel proceeding resting upon the same facts and addressing the same legal arguments.
2. What the scope of strict liability regime is under Ecuadorian law.
3. When the statute of limitation starts to run in cases of environmental contamination.
What the duties of an oil operator are in cases of environmental harm and infrastructure damage.
Facts:
At the core of the dispute are several geographical areas of Ecuador, rich in natural resources. Blocks 7 and 21 are located in the Amazon region of Ecuador. Both Blocks overlap with the biosphere reserves established pursuant to the UNESCO Man and Biosphere Program. [paras. 39, 48] Block 21 also overlaps with the Huaorani Indigenous Reserve and is a residence to a number of indigenous communities. [para. 48]
Block 7 was first developed by the British Petroleum Development Limited, beginning in 1985. The area to the northeast of Block 7 belonged to a common oil deposit operated by Ecuadorian State Petroleum Corporation. Between 1990 and 2000, several operators operated Block 7 and the area to the northeast of Block 7. In 1990, Oryx acquired 100% rights over Block 7 and concluded an agreement with the State-owned enterprise Petroproducción concerning alternate operation of the area to the northeast of Block 7. Petroproducción operated the area between February 1991 and February 1994, Oryx between February 1994 and June 1997, and Petroproducción reassumed operations from June 1997 through February 2000.
In 2000, the operating companies and Petroecuador concluded a contractual framework, the Production Sharing Contract (“PSC”), regulating joint operation of Block 7 and the area to its northeast. The two areas, Block 7 and the area to its northeast, have been jointly administered ever since. The jointly operating companies “were to invest in the Block at their own risk in exchange for a share of the crude oil produced” under the contractual framework. In December 2002, Perenco became an operator of the Block. The Perenco- Burlington Consortium (“Consortium”) had been operating Block 7 since September 2005 and until July 2009. [para. 46]
Texaco and Exxon had been operating Block 21 prior to 20 March 1995, at which point Oryx and Ecuador entered into a participation contract for Block 21. Between 2001 and 2005, Burlington acquired 46.25% interest in the Block, whereas Perenco owned and operated the remaining share. [para. 49]
Expropriation of Burlington’s interest in the said Blocks took place in August 2009. [para. 333]
Holding:
Parallel proceedings: The Tribunal must resolve the dispute solely on the record and merits before it, mindful of the risk of double recovery and contradictory decisions. Whenever the Tribunal reaches a conclusion different from that of a tribunal arbitrating the same arguments resting upon the same facts, the Tribunal shall refer to such divergent conclusion. [para. 69] In principle, the Tribunal’s decision “cannot serve and may not be used to compensate . . . twice for the same damage.” The issue of double recovery should be addressed by the relevant tribunal issuing its decision in the second place. [para. 1086]
Strict liability standard: The regime of strict liability for environmental claims, instituted in Ecuador in 2008 with the passing of the new Constitution, has no retroactive effect. [para. 233] The strict liability regime, however, had been applied in Ecuador at the very least since 2002 with regard to hazardous operations. [para. 247] The Constitution of Ecuador 2008 sets the rules of strict liability. Exercise of a “risky activity and the occurrence of harm that is plausibly connected to such activity” creates a presumption of causation. [para. 232] Once Ecuador shows environmental harm “reasonably related to [Burlington’s] risky activities . . ., [Burlington] then carries the burden of demonstrating that there is no harm or, if there is harm, what its limits are.” [para. 227] The burden to prove inexistence of harm falls on the operator. [para. 225] Strict liability may be avoided if Burlington shows that harm was caused by (i) force majeure, (ii) a third party, including prior or subsequent operator, or (iii) Ecuador. [paras. 232, 257, 264]
Strict liability and fault: A showing of fault is not required under the strict liability regime. [paras. 228, 230, 257] Finding of fault, however, may indicate partial attribution to Burlington of the harm caused by prior operators. Such attribution would be appropriate in instances where mismanagement of the infrastructure that had been built by preceding operators is proven. [para. 410]
Statute of limitations: There is a trend in comparative and private international law to consider the statute of limitation as a substantive issue. [para. 253] The limitation period only starts to run from the discovery of the environmental harm caused or insufficiently remediated, since strict liability is focused on the result, not on the act causing the harm. [paras. 254, 255, 275]
The duty of full restoration and environmental harm: Under the Constitution of Ecuador 2008, any environmental harm triggers the duty of full restoration but under the conditions and on the basis provided for by law. [para. 275] An oilfield must be operated within permissible limits established by Ecuadorian law. Such permissible limits determine when a negative impact, having exceeded permissible limits, becomes environmental harm. [para. 291] The tribunal must undertake a case-by-case analysis of the alleged environmental harm in each site. In cases of doubt, the tribunal must apply the most protective standard under the principles of precaution and in dubio pro natura set out in the new Constitution of Ecuador 2008. [para. 343]
Remediation costs: Local prices, as opposed to international prices charged by international contractors, must be used to calculate remediation costs because remediation activities contemplated in the present dispute have been “routinely undertaken” in the region. [paras. 423–24]
Abandonment costs: The operator that failed to take steps towards abandonment of the non-productive sites must bear the abandonment costs. [para. 886]
Obligations related to the return of the infrastructure: The oilfield operator has two obligations related to the return of the infrastructure. First, an obligation de moyens, requiring the operator to use “generally accepted standards and practices in the petroleum industry.” Second, an obligation de résultat, obligating the operator to “return the equipment in good (working) condition, except for normal wear and tear.” [paras. 925, 928]
Analysis:
Having acknowledged the application of in dubio pro natura principle, the Tribunal applied a more favourable to the investor definition of environmental harm and a less stringent remediation standard than those advocated by Ecuador. The Tribunal did refer to and apply the principle in dubio pro natura once in interpreting local environmental regulations. [fn. 1506] As a result, the scope of soil remediation required of Burlington fell significantly below Ecuador’s estimates and the amounts claimed (USD 2,797,007,091.42) exceeded by almost 67-fold the amounts awarded (USD 41,776,492.77).
The Tribunal was called to examine and apply Ecuadorian law to the issue of environmental harm and remediation following the Parties’ agreement of 26 May 2011. That agreement — to refer any counterclaims arising out of the subject investments — was fuelled by the desire of the Parties to “ensure maximum judicial economy and consistency.” [para. 60] It is debatable, however, whether “maxim[ising] judicial economy and consistency” is a proper metric in matters of public interest, including environmental harm. Moreover, as the Perenco tribunal noted, the adjudicators in the arbitration were reviewing novel issues of Ecuadorian constitutional law. (*Perenco Ecuador Limited v. Republic of Ecuador, ICSID Case No. ARB/08/6, Interim Decision on the Environmental Counterclaim, 11 August 2015, para. 322*) It is perhaps with extra caution that future respondents should consider referring novel issues of environmental law under their domestic legislation, including Constitutional interpretations, to supranational institutions consisting of foreign adjudicators.
The Decision sets an encouraging example of using international dispute resolution mechanism to remedy wrongful conduct of investors, thus addressing the asymmetry of the current investor-state dispute settlement system. It also provides an avenue for States to punish multinational perpetrators and offset potential unfavourable arbitral awards — the result that may have been impossible to achieve practically through local means.
Notably, the tribunal in the parallel proceeding initiated by Burlington’s consortium partner, Perenco, acknowledged “its duty to eliminate the risk of double recovery,” referring to the Decision on Counterclaims in the present arbitration. The tribunal mentioned that parallel proceedings should be avoided but noted that neither tribunal in the parallel proceedings concerning Ecuador’s counterclaims “had the power to order the consolidation of the parts of the proceedings relating to counterclaims proprio motu.” (*Perenco Ecuador Limited v. Republic of Ecuador (Petroecuador), ICSID Case No. ARB/08/6, Decision on Claimant’s Application for Dismissal of Ecuador’s Counter-claims, 18 August 2017, paras. 33, 52*)
