As originally published in www.energierecht.nu.
ICSID Tribunal Issues Temporary Restraining Order Against Ecuador
In a recent procedural order issued by a tribunal constituted under the rules of the International Centre for Settlement of Investment Disputes ("ICSID") the question of whether the holder of two oil field concessions had a right to receive a temporary restraining order halting the seizure of its assets by the host government was considered. The dispute itself concerns a decree published and enacted by the Ecuadorian government in October of 2007 which increased the government‘s shares to 99 % of what is termed the "extraordinary revenue" derived from a concession, or in other words, revenue earned that was above the set, minimum price per barrel. The Claimants (Burlington Oriente et al.) in the arbitration are holders of interests in two separate oil fields known as Blocks 7 and 21 found within the Amazon basin which were affected by the government‘s decree.
Following the publishing of the new decree, which had the effect of causing Burlington to suffer considerable loss of revenues from its operations in Block 7 and 21, Burlington ceased making payments to the Ecuadorian government, and instead diverted revenues from the affected blocks to a special, segregated account. Burlington also initiated arbitration together with several other investor companies against the Government of Ecuador and the state oil company known as "PetroEcuador". Their respective production sharing contracts (PSCs) called for ICSID arbitration, and the application of law of Ecuador. For its part, the government of Ecuador and PetroEcuador initiated a procedure referred to as a coactiva proceeding (administrative proceeding) to recover the unpaid amounts it was owed under the new decree. The coactive tribunal ordered in March of 2009 the immediate seizure of all crude production and cargo relating to Blocks 7 and 21 in satisfaction of the outstanding debt "owed" by Burlington to the government.
Burlington responded within the ICSID arbitration proceedings by filing a request for an interim measure asking that the government be restrained from adopting any decision or action which would (1) lead to the forced payment of the amounts in dispute, (2) affect the current situation regarding Blocks 7 and 21 (to Burlington‘s harm) or (3) cause a further aggravation of the dispute. The request was opposed by the government.
In reviewing the matter, the ICSID tribunal adopted the following critera: "... provisional measures can only be granted under the relevant rules and standard if rights to be protected do exist, and the measures are urgent and necessary." Based on this two pronged analysis, the Tribunal first turned to the question of whether Burlington had an existing "right" which could be protected.
Right to Preserve the "Status Quo" of the Dispute
Burlington argued inter alia, that the order restraining the Government of Ecuador was need to maintain the status quo and "non aggravation of the dispute". It had been argued by Ecuador that interim measures could only be granted in relation to the substantive issue in dispute, however the Tribunal disagreed and stated that, "... the rights to be preserved by provisional measures are not limited to those which form the subject matter of the dispute or substantive rights as referred to by the Respondents, but may extend to procedural rights, including the general right to the status quo and to the non-aggravation of the dispute. These latter rights are thus self-standing." In other words, an investor party has the right to ask the tribunal to preserve the current status of its investment and prevent the seizure of its assets during the course of the arbitral proceedings under international law. The tribunal further found that, "There is no doubt in the Tribunal‘s mind that the seizures of the oil production decided in the coactive proceedings are bound to aggravate the present dispute."
Urgency and Necessity or Need to Avoid Harm
Turning to the second prong of the analysis, the Tribunal found initially that an interim measure was deemed urgent when it is sought in order to prevent the aggravation of the dispute. The more difficult question is whether the interim measures are needed prevent the occurrence of "irreparable harm". It is clear precedent in international law that "irreparable harm" is interpreted as harm which is not compensable through the payment of monetary compensation, and therefore the issue was whether the planned seizure of Burlington‘s assets was harm which could be easily remedied by awarding damages.
The Tribunal considered that the seizure of Burlington‘s Block 7 and 21 assets meant that the investment would be rendered no longer economically feasible, "The risk here is the destruction of an ongoing investment and of its revenue producing potential which benefits both the investor and the State." The loss of or destruction of the investment would be lost to both parties, which is something that is not simply repaired by the payment of compensation by the government to the investor. Therefore, in the interest of preserving the investment, which essentially meant the production and revenue earning capacity for Block‘s 7 and 21, the tribunal felt that it was necessary to order the Government to halt its planned seizure of the crude and cargo relating to Block 7 and 21 and to enjoin the parties to continue their involvement in the investment.
Conclusion
This procedural order gives an interesting insight into the thinking of international arbitrators concerning energy investments. Clearly, the focus of the tribunal was not simply restricted to determining compensation which may or may not be owed to investors when government actions affecting their property are complained of. Rather, the Tribunal in this instance believed its mandate also extended to the protection of the value of the investment itself, and the preservation of the status quo.
Nathan D. O‘Malley,
Conway & Partners, Rotterdam
Click here to read the full decision.