Ecuador awarded USD41 million in counterclaim against US oil and gas company Burlington Resources

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IISD | 26 September 2017

Ecuador awarded USD41 million in counterclaim against US oil and gas company Burlington Resources

by Matthew Levine

Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5

On February 7, 2017, a tribunal at the International Centre for Settlement of Investment Disputes (ICSID) issued its decision on the counterclaims raised by Ecuador against U.S. oil and gas company Burlington Resources Inc. (Burlington). The tribunal ordered Burlington to pay USD41 million in compensation to Ecuador for environmental and infrastructure damage.

Background

Beginning in 2000, Burlington started to acquire ownership interests in PSCs for the exploration and development of oilfields in Ecuador. In 2008 Burlington initiated ICSID arbitration to challenge measures by Ecuador that affected the company’s investment in the oilfields.

In a December 2012 Decision on Liability, the tribunal found that Ecuador unlawfully expropriated Burlington’s investments. In its Decision on Reconsideration and Award on February 7, 2017, it quantified the damages owed to Burlington in USD380 million.

In 2011, during the Burlington-initiated proceedings, Ecuador raised counterclaims for harm to the environment and certain related infrastructure. According to the environmental counterclaim, Burlington was liable under domestic tort law for soil remediation, groundwater remediation, and the abandonment of wells causing mudpits. According to the infrastructure counterclaim, Burlington had failed to maintain investment-related infrastructure prior to the expropriation. Ecuador’s counterclaims amounted to roughly USD2.8 billion.

The parties entered into an agreement in May 2011 conferring the tribunal with jurisdiction over the counterclaims. The tribunal issued its Decision on Counterclaims also on February 7, 2017.

Both Ecuadorian law and international law applicable to the environmental counterclaim

As a preliminary matter, the tribunal had to decide the legal basis on which Ecuadorian law applied to the substance of the counterclaims. In particular, the environmental counterclaim was brought under domestic tort law but the choice of law provision in the Production Sharing Contracts (PSCs) between Burlington and Ecuador did not contain any reference to tort law.

The tribunal found that the applicability of Ecuadorian tort law was not the product of agreement between the parties as per the first leg of Article 42(1) of the ICSID Convention. Instead, Ecuadorian tort law was applicable as the domestic law of the host state under the second leg of Article 42(1). Having triggered this second leg, the tribunal observed that international law may also be applicable and that, according to the dominant approach, it was left to the tribunal’s discretion to apply either domestic or international law depending on the type of issue to be resolved.

Domestic law mandates strict liability for environmental harm

The tribunal extensively reviewed statutory and judicial developments applicable to oilfield operations in Ecuador. Following the promulgation of the country’s 2008 Constitution, it found a strict liability regime for environmental harm, under which the operator has the burden of proving the inexistence of harm, the operator is only responsible for the harm it caused, and environmental claims are imprescriptible. According to the tribunal, the absence of a requirement of fault meant that Burlington could not avoid liability by establishing that it had acted diligently.

Having found that the constitutional strict liability regime did not apply retroactively, the tribunal considered the parties’ diverging views on the liability regime for hydrocarbons operations prior to

the 2008 Constitution. Burlington argued that the law was fault-based and that Ecuador accordingly needed to prove both that environmental harm took place and that it was caused by the investor’s lack of diligence. The tribunal found this position untenable and decided instead, in line with Ecuador’s arguments, that following a series of judicial developments through the Ecuadorian Supreme Court, strict liability governed environmental harm by hydrocarbon operators from, at the very latest, 2002.

The parties agreed that claims for harm caused after the 2008 Constitution were imprescriptible. Burlington argued, however, that most of Ecuador’s counterclaims were tied to conduct taking place after the 2002 cut-off recognized above and prior to the 2008 Constitution. The tribunal rejected Burlington’s position that this triggered a four-year statute of limitations in domestic law. Instead, it found that the limitation period only started to run from Ecuador’s discovery of harm. As such, the tribunal decided that the preponderance of the environmental counterclaim was based on harm discovered after January 2007 and was therefore timely.

Tribunal undertakes site-by-site analysis of environmental harm and remediation costs

Having established that strict liability, either under the 2008 Constitution or Ecuadorian civil law, was applicable to the oilfields, the tribunal considered the alleged environmental harm.

For the tribunal, the level of impermissible environmental harm had to be determined in light of domestic regulatory criteria. On this basis, it conducted a comprehensive examination of harm and the cost of remediation at no less than 40 sites distributed across the two oilfields explored by Burlington. This included a site visit by the tribunal.

The tribunal found environmental harm and a need for remediation at all the sites. For most sites, the valuation was placed at less than USD1 million. In the particular cases of one soil contamination site and one mudpit site, it awarded costs in excess of USD5 million per site. It also awarded remediation costs of more than USD5 million for ground water contamination in one site.

Tribunal sustains infrastructure counterclaims of more than USD2.5 million

According to the tribunal, certain clauses of the PSCs triggered by its termination established a complete legal framework for evaluating the infrastructure claims. Although cognizant of certain evidentiary limitations, it evaluated seven categories of infrastructure: fuel tanks, fluid lines and pipelines, generators, pumps, electrical systems, information technology equipment, and road maintenance.

Ecuador claimed that the investor had returned three fuel tanks—out of a total of 89 tanks deployed in the oilfields—in a state evidencing deterioration beyond normal wear and tear. For two of these tanks, the tribunal ordered compensation to Ecuador of slightly more than USD1 million.

The tribunal found that significant parts of two pipelines were beyond normal wear and tear. It thus granted the costs in the amounts identified by Ecuador’s technical witness—slightly less than USD1.5 million. The tribunal further granted roughly USD500,000 for costs associated with Burlington’s lack of regular maintenance on certain engines used in the oilfields.

Notes: The tribunal was composed of Gabrielle Kaufmann-Kohler (President appointed by the parties, Swiss national), Stephen Drymer (claimant’s appointee, Canadian national), and Brigitte Stern (respondent’s appointee, French national). The Decision on Ecuador’s Counterclaims is available in English and Spanish at https://www.italaw.com/cases/documents/5140.

Matthew Levine is a Canadian lawyer and a contributor to IISD’s Investment for Sustainable Development Program.

source: IISD