Perenco Ecuador Ltd. v. Republic of Ecuador, No. 1:19-cv-2943 (JMC) (D.D.C. Mar. 16, 2023) [click for opinion]
Perenco Ecuador Ltd. ("Perenco"), a company owned by French nationals and incorporated under the laws of the Bahamas, explores and exploits hydrocarbons internationally. In September 2002, Perenco, alongside two other companies, invested in two blocks of oil reserves in Ecuador. The relationship fell apart within only a few years, with Ecuador ultimately cancelling Perenco's contracts because Ecuador was not sharing in the significant revenues Perenco was earning while oil prices soared.
Prior to 1993, Ecuador utilized "service contracts" to facilitate investment in its hydrocarbon industry, whereby international oil companies agreed to develop oil deposits for a fixed fee. Recognizing the lack of incentive for those invested oil companies to maximize output under the fixed-fee model, Ecuador switched to "participation contracts" in 1993, wherein oil companies received a share of the oil they produced. Thus, when oil prices skyrocketed in the early 2000s, so too did Perenco's profit margin.
Ecuador responded by seeking to wind back the clock, passing legislation allowing the government to retain the considerable profit margins previously due to the oil companies and return the oil companies' margins to those when the individual participation contracts were executed. Specifically, Ecuador withheld 50% of "extraordinary income" earned by oil companies, defined as revenue earned when oil prices exceeded the price that was effective at the time the participation contracts were executed. In 2007, the Ecuadorian government expanded its share to 99% of extraordinary revenue.
Perenco and Ecuador began to renegotiate their contract, but negotiations ended when Ecuador's then-president declared on April 30, 2008 that all existing participation contracts would be terminated and that new service contracts would be drafted. Through a series of subsequent actions, Ecuador assumed control of the Perenco oil reserves and declared the contract "expired."
Perenco filed for arbitration before the International Convention on the Settlement of Investment Disputes ("ICSID"). The tribunal determined that Ecuador's decision to increase its share was unlawful, as was its termination of the participation contracts. Perenco was awarded $400 million. Perenco then sought to enforce the award in the U.S. District Court for the District of Columbia.
In response to the enforcement action, Ecuador did not substantively challenge the award, but instead sought several forms of relief seeking to setoff or otherwise limit the amount owed. Specifically, Ecuador sought three forms of relief. First, Ecuador asked the court to set off a portion of the award with unpaid tax debts that Perenco allegedly owed. Second, Ecuador asked the court to stay another portion of the award while other tax issues were resolved. And third, Ecuador asked the court to order that post-judgment interest be calculated at the statutory rate in 28 U.S.C. § 1961, as opposed to the post-award interest rate provided for in the award.
The court first rejected Ecuador's arguments regarding a setoff and a stay. Because the ICSID Convention does not permit setoffs in enforcement proceedings if the parties dispute the validity, finality, or amount of the setoff, the court declined to set off the award on the basis of Perenco's alleged tax liability. For the same reason, the court declined to hold enforcement in abeyance. Such challenges, the court explained, were not within the ambit of the court's limited enforcement jurisdiction, and should have been raised before the ICSID tribunal given the dispute over the proposed offsetting debt.
The court acknowledged that there may be instances where a setoff may be appropriate: for example, where the setoff is undisputed or where the objection to it was frivolous. But here, Perenco had actionable appeals for each claimed debt. Thus, entertaining Ecuador's arguments at the enforcement stage would run afoul of the court's obligation to enforce ICSID awards. As to the stay, the remote possibility that pending litigation would lead to an undisputed setoff at some future point in time was not sufficient to justify a stay. As succinctly put by the court: "[I]t is not appropriate to indefinitely mire enforcement of the Award in the hopes that, at some undefined point in the future, the [p]arties might reach an undisputed setoff."
As to the issue of post-judgment interest, Perenco argued that the parties contracted around the generally-accepted principle, rooted in the doctrine of merger, that once judgment is entered, interest begins to accrue on the new obligation—that is, the judgment to be satisfied. The court explained that a contract seeking to sidestep that principle must do so unambiguously and unequivocally. Here, Perenco failed to point to any such language, and a joint status report noting that Ecuador's liability was "subject to additional post-Award interest until full and final payment" did not unambiguously communicate an intent to circumvent the general merger rule. Accordingly, the court applied post-judgment interest at the rate set forth in 28 U.S.C. § 1961.
Benjamin Cody Davis of the Miami office contributed to this summary.
