Investment treaty update

James Arrandale, senior associate, London

Speedread

In this update we comment on the largest award ever issued by ICSID tribunal (the Occidental -v- Ecuador award), the first ICSID claim brought by a mainland Chinese claimant (against Belgium) and recent developments in the Yukos arbitrations.

Full article

Occidental -v- Ecuador award

In what is reported to be the largest award ever issued by an ICSID tribunal, the government of Ecuador has been ordered to pay Occidental Petroleum Corp, the fourth-largest oil company in the United States, US$1.77 billion plus interest. The decision is a further illustration of the various ways in which the "fair and equitable treatment" obligation may be applied in investment treaty arbitration.

The dispute arose out of a May 1999 Participation Contract between Ecuador and Occidental, for exploration activities in Block 15 of the Ecuadorian Amazon region. In 2000 Occidental entered into a Farmout Agreement with Alberta Energy Corporation Ltd ('AEC') whereby the latter acquired a 40 per cent economic interest in the block. In May 2006, the Ecuadorean government terminated the Participation Contract, on the alleged basis that the company had made the assignment to AEC without the required ministerial authorisation.

In its decision on 5 October 2012, the ICSID tribunal held that Occidental had effected an assignment in violation of Ecuadorian law, but that the Ecuadorian government's response in terminating the Participation Contract was disproportionate: there were a number of alternative remedies available, and the Tribunal held that termination should have been a last resort. As a result, Ecuador breached the fair and equitable treatment obligation within the US/Ecuador BIT. At the same time, the Tribunal found that Occidental's failure to obtain the required ministerial authorisation constituted a contributory factor in its losses, and accordingly awarded only 75 per cent of the amount claimed.

Ecuador has filed a request for annulment of the award.

Chinese investment treaty claim

A Chinese investor has recently brought a claim against Belgium at ICSID. This is the first claim brought at ICSID by a mainland Chinese claimant. The claim was brought by Ping An, the world's second-largest life insurer by market value, and arises from the collapse and nationalisation of Belgian-Dutch financial services group Fortis.

China is notable in that it has signed more bilateral investment treaties than almost any other country, reflecting its historical position as a recipient of foreign direct investment. As Chinese companies now increasingly look to invest in foreign markets, those investors will accordingly have the advantage of a very wide range of protections for their investments abroad.

Yukos update

In an award handed down on 20 July 2012, an SCC tribunal has found that actions by the Russian authorities against OJSC Neftenaya Kompaniya Yukos ("Yukos") amounted to an expropriation under the Spain-Russia bilateral investment treaty. The arbitration was commenced in 2007 by a group of Spanish investment funds which held minority stakes in the company.

The Tribunal found that the Russian government's actions, which included the freezing of Yukos' assets, the failure to consider its proposals of alternative means of paying tax assessments, and the seizure and fast-track auction of its most valuable production subsidiary, YNG, "demonstrate[d] that the Respondent ... prevented Yukos from discharging its tax debt". Notably, however, the Tribunal considered that it had no jurisdiction to rule on whether the expropriation had been unlawful: "[Russia is] simply being ordered to pay for what it took, valued at the time of taking it."

In calculating the compensation to be paid to the Claimants, the Tribunal determined the market value of Yukos' shares at the date of the expropriation, which was held to be the date in November 2007 that Yukos was removed from the Russian companies register. The price of Yukos shares in 2004 (before Yukos filed for voluntary bankruptcy) was then projected to 2007 with reference to the performance of the shares of four other Russian oil companies (Lukoil, Surgutneftegaz, Bashneft and Tatneft). These calculations were then used to arrive at a valuation for the entirety of Yukos of approximately US$62 billion. Of this, US$2.6 million was awarded to the Claimants.

The Claimants' costs, amounting to over US$14.5 million, were funded by the majority shareholder of Yukos, Group Menatep Limited, which was not a party to the arbitration. Unlike normal third party funding arrangements, where the funding party has a legal entitlement to recovery, the Claimants had merely a moral obligation to share their recovery with Group Menatep. The Tribunal declined to order that Russia pay the Claimants' costs, with the result that the Claimants lost financially from the proceedings (since damages were significantly outweighed by their costs) notwithstanding that their claim was upheld in part.

However, it has been suggested that the SCC tribunal's decision is likely to have significance for other Yukos-related proceedings, including the ECT claim that Menatep and other majority shareholders in Yukos are pursuing against Russia at the Permanent Court of Arbitration in The Hague.

 

Please click on the links below for the other articles in the February 2013 Arbflash:

• Asymmetric dispute resolution clauses: proceed with caution
• Anatomy of an arbitration Part I: Why arbitrate?
• Queen Mary 2012 survey on international arbitration practice: snapshot of key findings
• Arbitration in China: CIETAC developments
• Australian High Court considers constitutional challenge to Australia's international arbitration regime
• International round-up
• Frequently asked questions: is my tiered dispute resolution clause binding?