By a decision published on 2 November 2015 an ad-hoc Annulment Committee acting under the rules of the International Centre for Settlement of Investment Disputes (ICSID) partially annulled on grounds of manifest excess of powers the award of the Tribunal in Occidental Petroleum Corporation, Occidental Exploration and Production Company v The Republic of Ecuador.
The investment dispute concerned the termination by Ecuador, through an administrative decree, of a Participation Contract between Occidental Exploration and Production Company (OEPC) and the national oil company of Ecuador for the exploration and exploitation of hydrocarbons in Block 15 in the Ecuadorian Amazon. As a result of the decree, OEPC was forced to turn over to Ecuador all Block 15 assets without any compensation. OEPC and its parent, both US incorporated companies, alleged that the termination breached domestic and international law, including the Bilateral Investment Treaty between the US and Ecuador (US-Ecuador BIT). The termination was triggered by the farmout of a 40% ownership interest in the Block 15 investment to AEC, a Bermudan company (which resold its interest to Andes, a Chinese company) without obtaining the required authorisation from the competent Ecuadorian Minister. The parties agreed to execute the farmout in two phases: first only the beneficial ownership was to be transferred and then the legal ownership. The farmout was for good consideration and the transferee contributed towards the expenditures of the project. Ecuador refused to authorise the transfer and terminated the concession of OEPC. The Tribunal found that the termination was in breach of domestic and international law, including the US-Ecuador BIT, and ordered Ecuador to pay damages of USD 1.76 billion. The awarded damages represented a compensation for 100% of the value of Block 15, less a 25% reduction factor for OEPC’s breach of the Participation Contract by failing to secure the required ministerial authorisation for the farmout.
Ecuador applied for the annulment of the award based on a number of grounds set out in the ICSID Convention. The Annulment Committee accepted that the Tribunal manifestly exceeded its powers to the extent that it assumed jurisdiction over an investment beneficially owned by the Chinese transferee. Accordingly, the Annulment Committee decided that the compensation payable by Ecuador should be limited to 60% of the value as the beneficial ownership of the remaining 40% had been transferred to a third party and OEPC could not claim as legal owner in the name of the beneficial owner. The Annulment Committee noted that the limitation of ICSID jurisdiction is “a natural consequence of international investment law” and “protected investors cannot transfer beneficial ownership and control in a protected investment to an unprotected third party, and expect that the arbitral tribunal retains jurisdiction to adjudicate the dispute between the third party and the host State. To hold the contrary, would open the floodgates to an uncontrolled expansion of jurisdiction ratione personae, beyond the limits agreed by the States when executing the treaty”.
The Annulment Committee held that it was empowered to substitute the Tribunal’s figure of damages with the correct one as “this task [could] be performed without further submissions from the Parties and without additional marshalling of evidence” and that “basic reasons of procedural economy [spoke] in favour of this solution” rather than allowing the parties to go through a second investment arbitration. Accordingly, the Annulment Committee substituted the damages to ca. USD 1.06 billion.
The decision of the Annulment Committee reflects the principle of international investment law that claimants are only permitted to submit their own claims, held for their own benefit. The decision is available here.