Ecuador v Occidental Exploration & Production Co

Under a bilateral investment treaty, a tax matter remains within investor–state arbitration where it has a sufficiently broad link with the observance or enforcement of the contractual bargain in an investment agreement. The relevant terms are not confined to express or implied contractual terms or claims for contractual damages.

Once a tax matter falls within the treaty’s tax exception, the treaty provisions capable of application, including substantive treatment standards, apply. A court determining jurisdiction may examine the dispute’s substance and the parties’ presentation only so far as necessary to identify the jurisdictional gateway.

Ecuador appealed from an order of Aikens J dismissing its application under section 67 of the Arbitration Act 1996 to set aside an UNCITRAL arbitration award for want of substantive jurisdiction. The arbitration arose under a bilateral investment treaty between the USA and Ecuador and a contract granting Occidental Exploration & Production Company rights to explore and exploit hydrocarbons in Block 15.

The dispute concerned Ecuador’s refusal to refund VAT paid on inputs used in oil production. Ecuador argued that the treaty’s exclusion of taxation matters prevented arbitration, while Occidental relied on the exception for the observance and enforcement of terms of an investment agreement. The High Court rejected Ecuador’s challenge in [2006] EWHC 345 (Comm), reported at [2006] 1 Lloyd’s Rep 773. The central issues were whether the tax dispute fell within the exception and, if so, whether the treaty’s substantive protections applied.

1. Appeal dismissed. The Court of Appeal upheld the dismissal of Ecuador’s challenge under section 67 of the Arbitration Act 1996. The court could examine factual aspects of the dispute and the parties’ presentation insofar as necessary to determine the jurisdictional scope of the treaty, but it was not deciding the merits.
2. Treaty construction. The Vienna Convention on the Law of Treaties 1969 supplied the applicable rules of interpretation. The treaty had to be construed in good faith, by reference to ordinary meaning, context, object and purpose, with supplementary means available where appropriate. The object of a bilateral investment treaty includes effective protection for investors and access to international arbitration. In that context, uncertainties could permissibly be resolved in favour of the investor, with reference to (2004) 8 ICSID Reports 515.
3. Article X(2)(c). Article X generally excluded taxation matters, subject to the specified exceptions. The expressions observance and enforcement were disjunctive. Terms of an investment agreement meant the contractual bargain embracing all the parties’ obligations, rather than only express or implied terms in the narrow common-law sense. The phrase with respect to required a broad link between the tax matter and the contractual bargain.
4. That link existed where the tax authority’s decision was based on an asserted contractual allocation of VAT and the dispute required determination of whether refusing reimbursement departed from the bargain, including the underlying assumptions concerning the operation of Factor X. The VAT dispute therefore fell within Article X(2)(c).
5. The gateway question. Once the relevant tax matter fell within an Article X(2) exception, the opening words of Article X(2) applied the provisions of the treaty capable of application, not merely the dispute-resolution provisions. Articles II and III were therefore capable of applying alongside Articles VI and VII. The tribunal had jurisdiction to determine whether Ecuador had breached the treaty, including the national-treatment and fair-and-equitable-treatment obligations in Article II.

1. Court of Appeal (Civil Division): Appeal dismissed. The court upheld the dismissal of Ecuador’s section 67 challenge.
2. High Court of Justice, Queen’s Bench Division: Aikens J dismissed Ecuador’s application to set aside the award for want of substantive jurisdiction in [2006] EWHC 345 (Comm), reported at [2006] 1 Lloyd’s Rep 773.