Marc J. Goldstein Arbitrator & Mediator NYC
April 22, 2010

Chevron-Texaco v. Ecuador: The Measure of Damages for Denial of Justice-Type Claims

Ecuador’s violation of what I have called the “Effective Means” Clause of the US-Ecuador BIT (Art. II(7)) meant that Chevron-Texaco was entitled to recover the damages, if any, proximately caused by the non-adjudication of its breach of contract claims in the courts of Ecuador for an unreasonably long period of time.

The teams of American counsel squared off against one another could readily agree that the venerable Chorzow Factory case provided the classical formulation of the measure of damages for breach of an obligation imposed by international law: in a phrase, “restitutio in integrum.”

Applying the standard of putting the Claimant in the economic position it would have enjoyed but for the violation, argued Chevron, involved no particular conceptual difficulty. The Tribunal was simply required to determine the breach of contract damages recoverable in Ecuador courts under the law of Ecuador — properly and fairly applied — and award those damages to Chevron.

Not so, said Ecuador. What Claimant lost by reason of the BIT violation, they argued, was not the breach of contract damages, but the chance — the prospect, however uncertain — of the claimed damages recovery. The measure of damages should the amount recoverable if the contract claims were sustained, times the probability of success on those claims (including collection) in the Ecuador courts.

Ecuador’s argument followed the logic of economic analysis of claims. If the BIT violation is equated with a wrongful taking, and what was taken was the unliquidated claim, then the value of what was taken is the value of the unliquidated claim. That value, Ecuador said, must be found in the normal way by applying a risk-based discount rate to the best-case revenue stream.

But the Tribunal rejected this and sided with Chevron. Assuming the Tribunal could find, as it did, that Chevron would have prevailed on its contract claims in Ecuador’s courts if those courts had functioned “effectively,” then what is lost by reason of the treaty violation (or denial of justice) is not the claim, but the judgment. To bring the uncertainty of victory back into the case as a risk discount against damages, the Tribunal reasoned (at least implicitly), would take away the benefit of the Tribunal’s determination, as a proxy for a normally-functioning Ecuiador court, that Chevron would have prevailed.

In the Tribunal’s own words: “Respondent cannot simultaneously maintain both (1) that a claimant be required to prove that it would more likely than not have prevailed in the domestic courts, and (2) that a claim be discounted to reflect the probability of success. To apply both propositions would lead to an aporoach that would necessarily and systematically undercompensate claimants in cases that allege misconduct by a State’s judiciary.”

Whereas future Claimants in denial of justice cases will surely rely upon Chevron v. Ecuador as the benchmark for the measurement of damages, it would have been gratifying had the Tribunal’s analysis on this point been more elaborated. “Systematically undercompensate” looks more like a conclusion than a reason. But the reason is fully apparent: once the international tribunal has decided the state court claim as a surrogate state court, in order to measure damages for the BIT violation or denial of justice, the Claimant’s loss is not the chance to prevail on the claim in the domestic court but the value of a victory in that court.

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