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.

Dear Readers
My general website carries a commentary on an important new decision of the federal district court in Manhattan permitting attachment and execution against funds of the Argentine Central Bank at the New York Federal Reserve Bank, to satisfy bondholders’ judgments against the Republic of Argentina.
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Kind regards.
Marc Goldstein

Readers of Arbitration Commentaries may generally rely upon its principal author to read cases from beginning to end before reporting upon them in this corner of Cyberspace.

But whereas the Arbitral Tribunal in Chevron-Texaco v. Republic of Ecuador has seen fit to deliver a Partial Award on the Merits that runs to 265 pages, it is hoped that you will gratefully receive this interim report (based upon reading up to page 134 of the Partial Award) together with a promise that there will be more to come.( Here is a link to the full text of the Partial Award: http://ita.law.uvic.ca/documents/ChevronTexacoEcuadorPartialAward.PDF)

Chevron-Texaco brought claims under the 1997 U.S.- Ecuador Bilateral Investment Treaty, seeking redress for the fact that seven breach of contract claims against Ecuador for substantial sums were intractably snarled in the Ecuador judicial system. In general, the contract disputes related to allocation of energy production between the domestic market at domestic prices, and what Chevron-Texaco and its predecessors in interest would retain to sell in the world market at much higher prices.

The broad thematic basis of the claim in arbitration was denial of justice (“DOJ”) under customary international law, consisting of DOJ resulting from alleged unreasonable delay in the adjudication of the contract cases, and DOJ resulting from alleged manifestly unjust decisions by the Ecuador courts.

As alternative and additional theories of relief, Chevron-Texaco asserted violations of several provisions of the BIT: notably those that require “fair and equitable treatment,” “full protection and security,” avoidance of “arbitrary and discriminatory measures,” and, of particular importance to the outcome, Article II (7) of the BIT which required Ecuador to provide the investor with “effective means” of asserting claims (hereinafter, the “Effective Means Clause”).

The Tribunal examined the history of the Effective Means Clause in this BIT and related US BIT practice and found that it “was created as an independent treaty standard to address a lack of clarity in customary international law regarding denial of justice.” Per the Tribunal, the Effective Means Clause “constitutes lex specialis and not a mere restatement of the law on denial of justice,” and is a “distinct and potentially less demanding test” than DOJ under customary international law.

Here the Tribunal holds that one dimension of the duties arising from the Effective Means Clause is that the State must provide the Investor “with means of enforcing legitimate rights within a reasonable amount of time.” That treaty obligation was breached by Ecuador, the Tribunal holds, by reason of unreasonable delay in the adjudication of the seven breach of contract cases in the Ecuador courts, each of which had been pending at least 13 years and in some instances as long as 15 years, at the time of the Notice of Arbitration. Noting that the length of delay is not necessarily sufficient to reach a conclusion that the delay is unreasonable, the Tribunal cited “prolonged periods of inactivity” in nearly all the cases, especially prolonged periods of inactivity lasting many years after the close of evidentiary proceedings.

The Tribunal concludes that no adjudication of the other BIT claims — DOJ, fair and equitable treatment, full protection and security, arbitrary and discriminatory measures — is necessary, because no additional damages beyond those compensable for breach of the BIT’s Effective Means Clause were claimed by Chevron-Texaco.

… A further report will follow.

I briefly note here two recent cases in the federal district court in Washington, D.C., in which the judges refused to grant foreign governments stays of enforcement of awards against them, under Article VI of the New York Convention, based on proceedings pending in foreign courts to set aside the awards. (G.E. Transport S.P.A. v. Republic of Albania, 2010 U.S. Dist. LEXIS 24180 (D.D.C. Mar. 16, 2010); Continental Transfert Technique Ltd. v. Federal Government of Nigeria, 2010 U.S. Dist. LEXIS 27336 (D.D.C. Mar. 23, 2010).
Each decision relies upon the leading U.S. case elaborating standards governing the exercise of discretion to proceed with or suspend enforcement proceedings under the Convention: Europcar Italia, S.p.A. v. Maiellano Tours, 156 F.3d 310, 317 (2d Cir. 1998). The Second Circuit in Europcar provided a non-exhaustive list of six factors for consideration, with primary emphasis upon two of the six: the general objectives of arbitration (expeditious resolution of disputes), and the status and expected duration of the set-aside proceedings pending abroad.
In the Albania case, the government challenged the $20 million + award in favor of GE in a court at the arbitral seat — Rome, Italy — and lost its initial application in that court to enjoin GE from proceeding with enforcement. The Court relied on this preliminary negative assessment of Albania’s set-aside prospects, GE’s uncontested projection that the Rome court would not render a final judgment earlier than 2014, and the fact that Albania had been a full participant in three years of arbitral proceedings, in deciding to go forward with the enforcement action.
In the Nigeria case, the Court relied foremost upon negative inferences arising from Nigeria’s procedural conduct: having let pass the deadline for filing a motion to vacate in the Nigerian court, Nigeria then failed to appear in this enforcement case until the Claimant sought entry of a default judgment, then obtained a 45-day extension of time to respond to that motion, and filed its set aside case in Nigeria during the ensuing interval.
Further, the Court found that the set aside case in Nigeria was stalled, the presiding judge having retired and not been replaced, and was unpersuaded that the scope of review under Nigerian law would meaningfully less deferential that under the Convention as applied in US courts.

Dear Readers:
At my general website, I have introduced a new dimension entitled Counsel Culture Corner. There you will find current listings for the performing arts and artists’ exhibitions in leading arbitral venues — at this time New York, Paris, London, Hong Kong and Toronto. These pages also contain links to key arbitral resources of each jurisdiction –generally the governing arbitration statutes and the websites of the leading international arbitral institutions situated in those venues.
You are invited to visit Counsel Culture Corner…. and to submit your recommendations for updates to the listings!
Warm regards.
Marc Goldstein

Dear Readers:
At my general website, you will find commentaries on two recent federal court cases involving efforts by offshore hedge funds to use the arbitration mechanism of the Financial Institutions Regulatory Authority (FINRA) to recover losses sustained on credit default swaps. To reach the website, click on the link at the bottom of this window.
Warm wishes.
Marc Goldstein