Ecuador v Occidental Exploration & Production Co

For the purposes of a challenge under section 67 of the Arbitration Act 1996, the court conducts a rehearing of the jurisdictional issue and asks whether the tribunal was correct. A treaty exclusion of taxation matters must be construed according to its text and purpose. Under Article X.2 of the USA–Ecuador BIT, taxation matters are generally excluded, but the specified gateways permit the whole Treaty to apply to matters within their scope. The phrase “with respect to” creates a direct or indirect link, and “terms” of an investment agreement includes the contractual bargain and obligations arising under the applicable law. A tribunal determining international-law rights may make consequential declarations preventing double recovery. Such orders do not exceed its powers where they are directed to the claimant and do not determine the internal validity of national law.

The Republic of Ecuador applied under sections 67 and 68 of the Arbitration Act 1996 to challenge an UNCITRAL arbitration award in favour of Occidental Exploration & Production Co. The arbitration concerned VAT refunds connected with oil-production activities under a participation contract and the USA–Ecuador bilateral investment treaty.

The tribunal held that it had jurisdiction over claims under Article II of the Treaty because the dispute fell within Article X.2(c), and awarded compensation. Ecuador argued that the claims were excluded taxation matters and that the tribunal had exceeded its powers by making declarations concerning Ecuadorian proceedings. OEPC made a contingent challenge to the tribunal’s treatment of its expropriation claim.

1. Section 67 challenge dismissed. The court treated the application as a challenge to an award on the merits within section 67(1)(b). The court must rehear the jurisdictional issue and decide whether the tribunal was correct, rather than whether its decision was merely permissible. The tribunal’s jurisdiction depended on the nature of the dispute as presented, while the court had to avoid deciding the underlying merits.
2. Article X.2 of the BIT generally excludes matters of taxation from the Treaty. Its paragraphs (a), (b) and (c) are limited gateways. Once a taxation matter falls within one of them, the provisions of the whole Treaty, including Article II, apply to that matter. Article X.2(c) is not confined to direct taxation.
3. The words “with respect to” create a broad direct or indirect connection with the observance or enforcement of an investment agreement. “Terms” means the contractual bargain, including obligations arising under the applicable law. A relevant question is whether the taxation matter touches upon or affects the performance or enforcement of the investment agreement.
4. The VAT dispute fell within Article X.2(c). The VAT was connected with OEPC’s contractual obligations to undertake oil exploitation, invest at its own risk and pay Ecuadorian taxes. It also concerned the economic assumptions underlying the participation formula and the contractual correction mechanisms. OEPC’s failure to advance Article X.2(c) expressly before the tribunal did not prevent the tribunal from considering that gateway, particularly because Ecuador itself relied on the relationship between the contract and the taxation issue.
5. Section 68 challenge dismissed. The tribunal was entitled to declare OEPC’s international-law rights and to make consequential orders designed to prevent double recovery. The orders were directed to OEPC, did not invalidate Ecuadorian national law, and did not prescribe how Ecuador should fulfil its international obligations. In any event, no substantial injustice was shown.
6. OEPC’s contingent section 67 challenge did not arise. If it had arisen, it would have failed because the tribunal dealt with the expropriation claim on its merits, notwithstanding its use of the term “inadmissible”, and dismissed it.

This was a first-instance decision on challenges to an UNCITRAL arbitration award. The judgment records that an earlier justiciability decision had been given on 29 April 2005 and that the Court of Appeal dismissed OEPC’s appeal on 9 September 2005, reported at [2006] 2 WLR 70. The present court dismissed Ecuador’s applications under sections 67 and 68 of the Arbitration Act 1996.