Burlington Resources Inc. v. Republic of Ecuador
ICSID · Investment (ICSID and treaty) · Ecuador · 14 Dec 2012
Why it matters
This decision is a landmark in investment treaty law for its analysis of creeping expropriation and the distinction between lawful regulation and unlawful taking. The tribunal held that Ecuador's physical takeover of the oil blocks, following a series of tax measures and enforcement actions, constituted a direct expropriation. It also clarified that the failure to pay compensation rendered the expropriation unlawful, even if the state disputed whether expropriation occurred. The case is frequently cited for its discussion of the 'sole effects doctrine' and the relevance of the state's purpose in expropriation analysis.
Summary
Burlington Resources Inc., a US company, held production sharing contracts (PSCs) for Blocks 7 and 21 in Ecuador through its subsidiary. In 2006, Ecuador enacted Law 42, which imposed a 50% windfall tax on oil revenues, later increased to 99% for prices above a certain threshold. Burlington challenged the tax as a breach of the PSCs' tax stabilization clauses. Ecuador enforced the tax through coercive measures (coactiva), seizing oil and auctioning it. In July 2009, Burlington suspended operations, and Ecuador physically took over the blocks. Burlington initiated ICSID arbitration under the US-Ecuador BIT, claiming expropriation and breach of the umbrella clause. The tribunal first dismissed the umbrella clause claims for lack of jurisdiction. On expropriation, it analyzed whether Law 42 and its enforcement constituted a creeping expropriation. It found that Law 42 at 50% was not expropriatory, but at 99% it was, as it deprived Burlington of nearly all economic benefit. However, the tribunal concluded that the expropriation was completed by the physical takeover on 30 August 2009, which was a direct expropriation. The tribunal held the expropriation unlawful because Ecuador paid no compensation. The decision reserved quantum for a later phase. The case is notable for its detailed analysis of the interplay between tax measures and expropriation, and for rejecting the concept of creeping expropriation where a single measure (physical takeover) is itself expropriatory.
The detail
Parties: Burlington Resources Inc. v. Republic of Ecuador
Case number: ICSID Case No. ARB/08/5
Outcome: The Tribunal declared that Ecuador unlawfully expropriated Burlington's investment in Blocks 7 and 21 as of 30 August 2009, and dismissed all other claims.
Applicable law: Treaty between the United States and Ecuador concerning the Encouragement and Reciprocal Protection of Investment (1997); Ecuadorian law; Production Sharing Contracts for Blocks 7 and 21
Issues in play: The case involved the collision between Ecuador's sovereign right to tax (Law 42) and the investor's contractual rights under production sharing contracts, including tax stabilization clauses. The central issue was whether the tax law and subsequent enforcement measures amounted to expropriation under the BIT.
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