OIL AND GAS:

Chevron looks to arbitrators to save it from $18B pollution payout

Third of a three-part series.

The final battle in Chevron's high-profile war against an $18 billion judgment over oil pollution in Ecuador is likely to be fought behind closed doors in an ornate building in the Netherlands.

The Peace Palace -- a neo-Renaissance structure built in The Hague with the financial backing of industrialist Andrew Carnegie almost a century ago -- is home to the Permanent Court of Arbitration, whose specialty is resolving international legal disputes.

Although litigation continues both in Ecuador and New York over the February ruling against Chevron, experts say the arbitration court, which shares its grand home with the International Court of Justice, could have a crucial role to play.

That is because the court is currently considering a 2009 claim brought by Chevron against Ecuador in which the oil company claims the Andean nation violated a bilateral trade agreement between it and the United States.

The arbitration proceeding is one part of a tangled web of litigation that illustrates the oil company's no-holds-barred approach to the Ecuador case, which has been ongoing in various forms for 18 years.

Despite concerns raised by shareholders at last week's annual meeting at Chevron's San Ramon, Calif., headquarters about the judgment and the scant prospect of a settlement any time soon, the company has stressed its continued commitment to fighting to the bitter end.

In Ecuador, Chevron has appealed the $18 billion ruling entered by Judge Nicholas Zambrano, while in New York it is pursuing a federal racketeering case against the American lawyers who represent the indigenous plaintiffs, alleging the entire case is a scam.

But what the three-man arbitration panel concludes could be decisive, according to experts such as Peter McGrath, a partner at the Moore & Van Allen law firm in Charlotte, N.C., and a specialist in environmental law.

"The mechanism through which everything will be sorted out will be the arbitration," McGrath said.

Long-running saga

The genesis of the dispute between Chevron and Ecuador dates to when Texaco Petroleum Co. became part of an oil consortium that, during the 1970s and 1980s, worked alongside the Ecuadorean government-controlled company, Petroecuador.

Texaco withdrew from Ecuador in 1992, leaving Petroecuador in sole control of the oil fields, which are near the town of Lago Agrio in the eastern part of the country.

A year later, the plaintiffs -- backed by American lawyers -- filed their first lawsuit against Texaco in New York. It was eventually dismissed on jurisdictional grounds, but the plaintiffs sued again in 2003, this time in Ecuador.

Now, Chevron, which acquired Texaco in 2001, was the defendant.

It's that case that led eventually to February's mammoth ruling (Greenwire, May 17).

By that time, Chevron had already filed its arbitration claim, part of its wider legal strategy to undermine the plaintiffs' case, in part by pointing the finger at the Ecuadorean government (Greenwire, May 23).

"It's one of the options to seek justice," Chevron spokesman James Craig said of the arbitration proceeding.

The oil giant maintains that Ecuador is bound by the contracts Texaco entered into with the government before Chevron was ever on the scene.

That includes an agreement in which Texaco agreed to remediate some sites before leaving the country in return for the government absolving it from liability.

The plaintiffs, who are not parties to the arbitration, say the agreement only released Texaco from claims made by the Ecuadorean government and not private parties.

So far, the arbitration proceeding is at an early stage. The panel has not yet even decided whether it has jurisdiction to consider Chevron's claims, although legal experts think it will probably conclude that it does.

The only action the arbitrators have taken to date was to ask Ecuador not to allow the enforcement of the judgment while the panel continues its considerations (E&ENews PM, Feb. 11).

Chevron was particularly worried about that issue because the plaintiffs had a plan to petition courts around the world -- in countries where Chevron has assets -- to enforce the judgment

Ecuador has responded that the ruling could not be enforced immediately anyway because it remains on appeal in Ecuadorean courts.

An appeals court ruling is not expected for months.

"Right now, according to the Ecuadorean law, this judgment cannot be executed," Ecuador's attorney general, Diego Garcia, said in a recent interview in Quito, the Ecuadorean capital.

The panel's findings "didn't add anything to what the law already establishes in Ecuador regarding judgments that have not been executed and cannot be executed," he added.

Wide latitude

The arbitration panel -- consisting of two Brits and an Argentine, all experienced international lawyers -- has two points to consider if it decides it has jurisdiction.

The first is whether Chevron has any liability based on its agreement with the Ecuadorean government.

The second is whether Ecuador violated the bilateral treaty by failing to provide what could be described in American legal terms as due process.

Chevron's 281-page filing lays out in detail its argument that Texaco was released from all environmental claims and fulfilled whatever remediation obligations it had.

The oil company also argues that Petroecuador "has caused extensive environmental damage" since taking over full control of the sites in 1992 and repeats some of its claims about alleged fraud on the part of the plaintiffs, which are the basis of the racketeering suit in New York.

Furthermore, Chevron says the Ecuadorean government "is colluding with the plaintiffs to improperly influence the court and undermine Chevron's defense."

Ecuador will not file its response to Chevron's claims until after the panel agrees whether it has jurisdiction.

Chevron's complaint is not typical of the type of cases decided via international arbitration, according to Marcos Orellana, a senior attorney at the Center for International Environmental Law.

Arbitration is usually "most effective when there is clear government misconduct," he added. It is not clear that Chevron's allegations against the Ecuador government reach that level, Orellana said.

The tribunal has wide latitude in terms of what it might decide once it gets to the merits, but all of its rulings would be based on to what extent, if any, Ecuador is liable for anything Chevron is required to pay to the plaintiffs, according to legal experts familiar with the case.

In essence, the arbitration boils down to whether Ecuador has to indemnify Chevron from any losses it may incur as a result of the judgment in Lago Agrio.

But as Allen Weiner, who directs the international and comparative law program at Stanford Law School, pointed out, while the tribunal can require Ecuador to indemnify Chevron, it cannot stop the plaintiffs from seeking the damages in courts worldwide.

"There have been cases where people say there was a miscarriage of justice that violations treaty obligations," he added. "That's not to say Ecuador can stop plaintiffs enforcing the judgment."

It is also conceivable that the tribunal could, as Weiner put it, "slice and dice" Zambrano's ruling by finding fault with some aspects of it but not others.

Chevron might then have to pay some of the damages but not all of them, according to lawyers following the arbitration.

So far, based on what the three panel members have said, "they leave open the possibility of Chevron taking some responsibility," said environmental lawyer McGrath.

Courts around the world where the plaintiffs seek to enforce the ruling would likely view what the tribunal says as "impartial, independent guidance," Orellana said

"Any decision is likely to become an element in the mix that makes this litigation even more complex," he added.

What happens in the racketeering case in New York could also affect how favorably courts look upon the Ecuadorean judgment.

In the end, Chevron could be left in the difficult position of trying to recoup whatever it pays to the plaintiffs from the Ecuadorean government.

That could be problematic because the government, led by leftist President Rafael Correa, has some reservations about international arbitration and has also been critical of Chevron's conduct.

"They have expressed discomfort in going along with decisions made by international arbitrators," said Chevron's Craig. "They are not fans of international arbitration."

Attorney General Garcia said nothing to indicate otherwise.

His main argument is that Texaco -- albeit before Chevron was involved -- fought to have the original New York case dismissed in part on the grounds that it should have been filed in Ecuador.

Garcia maintains that Chevron should "respect the decision" that Texaco took at the time and let the case proceed in Ecuador.

"I think that international arbitration is not the useful way to resolve the case," he said.

Bad blood

At least week's meeting in San Ramon, one of the issues raised by shareholders was why Chevron has not settled the Ecuador case.

It is a question many observers have asked over the years.

Right now, no negotiations are taking place either with the plaintiffs or with the Ecuadorean government, Chevron says.

Following the meeting, the company even released a new tough-talking video that restated its allegations against the plaintiffs' lawyers.

With all the bad blood that exists between the parties -- which has become fractious even by high-stakes litigation standards -- there appears little chance of a deal.

Most corporations involved in such a case would now be keen to talk, but that is not how oil companies operate, according to McGrath.

"In my experience, oil companies in litigation act as if there's no chance they will lose," he said.

Independent journalist Irene Caselli contributed.

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