Recently, there has been a significant development in a long-running environmental dispute between Ecuador and Chevron. This conflict began in the 1970s and 1980s when Texaco (now a subsidiary of Chevron) ran drilling operations in the Amazon. These operations allegedly devastated the rainforest, polluted water supplies, and harmed indigenous people. In addition to environmental destruction, accusations of trickery and bribery surround the deal. Indigenous Andeans brought suit against Chevron, and in February of 2011, an Ecuadorean judge ordered Chevron to pay $8 billion in environmental damages. Chevron, which has no assets in Ecuador, plans to appeal the judgment. The plaintiffs plan on going after Chevron’s assets using the Ecuadorean court’s favorable judgment.
However, in a separate case regarding commercial disputes Chevron recently won a $96 million arbitration award against Ecuador at the Permanent Court of Arbitration in The Hague. The tribunal found that Ecuador violated international law by failing to provide impartial courts and not affording adequate due process. Ecuadorean courts are notoriously politicized and often fail to provide justice. Judges are not above accepting bribes for favorable decisions or allowing lawyers to draft judicial orders for the judge’s signature. For Chevron, the proceedings in Ecuador were significantly delayed and there were concerns about judicial impropriety. With such poor respect for the rule of law in Ecuador, Chevron sought an international remedy.
In the wake of the arbitration award, Ecuador plans to appeal. Ecuador claims that the tribunal does not have jurisdiction to hear the claim; therefore, the judgment is void. To support this, Ecuador points out that it was not party to a bilateral trade agreement with the US that directs disputes to the Permanent Court of Arbitration. Ecuador will challenge this in a Dutch district court and is prepared to appeal to the Dutch High Court.
This case is important because it tests the viability of international commercial arbitration agreements in large contracts. Traditionally, foreign companies are weary to resolve disputes with state actors–the government, state-controlled companies, or important state industries–in the courts of that state. There is a justified fear of favoritism. This is why arbitration is popular: it provides a neutral forum for resolving conflicts that neither party can easily manipulate. The award is enforceable in any state party to the New York Convention. Finding the arbitration agreement valid and enforcing the judgment would provide a strong precedent for similar situations in the future. States cannot take advantage of their sovereignty to abuse and arbitrarily change contracts. This could encourage more, larger investments in developing states.