On 11 August 2015, the Tribunal in the case of Perenco Ecuador Limited v. The Republic of Ecuador (ICSID Case No. ARB/08/6) issued an Interim Decision upholding environmental counterclaims alleged by Ecuador against Perenco. In so doing, the Tribunal rejected the expert reports of both parties since they “crossed the boundary between professional objective analysis and party representation.”
According to the Tribunal “each [expert] was attempting to achieve the best result for the party by whom they were instructed.” Consequently, the Tribunal decided to appoint an independent environmental expert to determine the extent of the contamination affecting the oil Blocks operated by Perenco, and, therefore, to which extent Ecuador would be entitled to indemnification.
Factual Background
Perenco initiated this arbitration in 2008 under the France – Ecuador Bilateral Investment Treaty (BIT) and two participation contracts for the exploration and exploitation of oil Blocks 7 and 21 located in the Ecuadorian Amazonian region. Perenco alleged that the Ecuadorian government’s application of a 99 percent tax on windfall oil profits constituted a breach of the BIT and of the participation contracts.
On 12 September 2014, the Tribunal issued its Decision on Remaining Issues of Jurisdiction and Liability, ruling in favor of Perenco’s claims that Ecuador’s measures breached the BIT and the participation contracts, although a determination on the amount of damages is pending.
However, during the course of the arbitration, in December 2011, Ecuador filed two counterclaims pursuant to Rule 40 of the ICSID Arbitration Rules alleging Perenco’s liability for environmental contamination in Blocks 7 and 21. According to Ecuador, its experts had determined the existence of an “environmental catastrophe.”
Ecuador requested the Tribunal to find Perenco liable for the cost of remedying environmental damage during its operations in Blocks 7 and 21 (from 2002 until 2009), quantified at USD 2,279,544,599 for soil clean-up costs, USD 265,607,700 for groundwater remediation costs and USD 3,380,000 for further groundwater studies. Ecuador argued that Perenco left Blocks 7 and 21 in a situation contrary to well-established legal principles for the protection of the environment, which were stated in Ecuadorian law and in the investor obligations under the participation contracts.
On the other hand, Perenco argued that the Tribunal should dismiss Ecuador’s environmental claims in their entirety and award costs in its favor. Perenco rejected Ecuador’s characterization of the environmental conditions of Block 7 and 21 as an “environmental catastrophe,” and indicated it was a responsible manager that focused on the preservation and that even improved the environmental and infrastructure integrity of the Blocks. According to Perenco, Ecuador’s counterclaims had the objective of diverting the attention of the Tribunal from the contractual and treaty breaches of Ecuador.
The Tribunal’s Analysis
In the introductory part of the Interim Decision, the Tribunal indicated that “[p]roper environmental stewardship has assumed great importance in today’s world.” The Tribunal noted:
“The Tribunal agrees that if a legal relationship between an investor and the State permits the fling of a claim by the State for environmental damage caused by the investor’s activities and such a claim is substantiated, the State is entitled to full reparation in accordance with the requirement of the applicable law.”
Also, the Tribunal made the following statement:
“The Tribunal further recognizes that a State has wide latitude under international law to prescribe and adjust its environmental laws, standards and policies in response to changing views and a deeper understanding of the risks posed by various activities, including those of extractive industries such as oilfields. All of this is beyond any serious dispute and the tribunal enters into this phase of the proceeding mindful of the fundamental imperatives of the protection of the environment in Ecuador.”
With respect to the participation contracts, the Tribunal citing specific provisions of the contracts established that Perenco agreed to comply with all laws and regulations in Ecuador applicable to the participation contracts, which included the environmental legislation. In addition, Perenco agreed to preserve the existing ecological equilibrium in the Blocks and undertook to clean up the area in order to allow its potential restoration to environmental conditions similar to those existing at the beginning of operations.
According to the Tribunal, Perenco’s claims of strong compliance on environmental law were not accurate since the evidence presented before the Tribunal did not show such strong compliance. The Tribunal indicated that the evidence presented combined with Perenco’s failure to document the environmental conditions at the time of the acquisition of its interests, its failure to report incidences of environmental damage, to conduct adequate audits, among other things, did not demonstrate a responsible operator regarding environmental protection.
However, the Tribunal did not trust the environmental experts presented by both parties since, for the Tribunal, “each [expert] was attempting to achieve the best result for the party by whom they were instructed.” The Tribunal added that the experts’ conduct “crossed the boundary between professional objective analysis and party representation.”
Consequently, the Tribunal after reviewing all the evidence concluded that it was satisfied that there was some contamination in Blocks 7 and 21 for which it is likely that Perenco would be held liable. However, in order to establish the amount of contamination, the appointment of an independent environmental expert was necessary. This expert would be instructed to apply the Tribunal’s findings and to work with the Tribunal and the parties to allow the Tribunal to determine the extent of contamination in the Blocks for which compensation by Perenco would be ordered.
