Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of Ecuador
ICSID · Investment (ICSID and treaty) · Ecuador · 5 Oct 2012
Why it matters
This case is a landmark for its detailed analysis of proportionality in expropriation claims, the fair market value assessment of an oil field, and the reduction of damages due to investor fault. It also clarified the standard for fair and equitable treatment and the requirement of proportionality in state sanctions, influencing subsequent investment treaty cases.
Summary
Occidental Petroleum Corporation and its subsidiary Occidental Exploration and Production Company (collectively 'Occidental') invested in Ecuador's Block 15 oil field under a Participation Contract with PetroEcuador, the state oil company. In 2000, Occidental entered into a farmout agreement with Alberta Energy Corporation (AEC) transferring a 40% interest in the contract without obtaining prior ministerial authorization as required by Ecuadorian law. Ecuador later declared caducidad (termination) of the contract in 2006, seizing the assets. Occidental initiated ICSID arbitration under the US-Ecuador Bilateral Investment Treaty (BIT), claiming expropriation and unfair treatment. The tribunal found that Occidental had breached the contract by failing to obtain authorization, but held that Ecuador's termination was disproportionate and violated the BIT's fair and equitable treatment and expropriation provisions. The tribunal awarded Occidental US$1.77 billion in damages, reduced by 25% due to Occidental's contributory fault. The award included pre-award interest at 4.188% compounded annually. The tribunal dismissed Ecuador's counterclaims for damages from Occidental's alleged destructive actions. The case is notable for its extensive analysis of proportionality, the Chorzów Factory standard for damages, and the application of Ecuadorian law to contractual breaches.
The detail
Parties: Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of Ecuador
Case number: ICSID Case No. ARB/06/11
Outcome: Ecuador breached the US-Ecuador BIT by failing to accord fair and equitable treatment and by expropriating the Claimants' investment; Claimants awarded US$1,769,625,000 plus interest.
Quantum: US$1,769,625,000
Applicable law: US-Ecuador BIT (1993), Ecuadorian Hydrocarbons Law, Participation Contract, ICSID Convention
Issues in play: The collision was between Ecuador's sovereign right to terminate a contract for breach (caducidad) and the investor's right to fair and equitable treatment and protection against expropriation under the BIT. The tribunal balanced the investor's contractual breach against the proportionality of the state's sanction.
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