THE REPUBLIC OF ECUADOR V OCCIDENTAL EXPLORATION & PRODUCTION CO (NO 2)

[2007] EWCA Civ 656, Court of Appeal, Sir Anthony Clarke MR, Lord Justice Buxton and Lord Justice Toulson, 4 July 2007

Arbitration – Bilateral Investment Treaty between Ecuador and the US – US company commencing arbitration against Ecuador – Company obtaining award – Whether award in excess of arbitrator’s jurisdiction – Proper construction of BIT –Arbitration Act 1996, section 67

This was an appeal from the decision of Aikens J, [2006] 1 Lloyd’s Rep 663. In August 1993 the US and Ecuador entered into a Bilateral Investment Treaty under which each country agreed that investments and associated activities by each other’s nationals would be treated no less favourably than its own nationals. Article X(2) stated that the BIT did not apply to “to matters of taxation” other than in respect of: “(a) expropriation, pursuant to Article III; (b) transfers, pursuant to Article IV; or (c) the observance and enforcement of terms of an investment agreement or authorization as referred to in Article VI (1) (a) or (b).” OECD, a US company, entered into a contract with an Ecuadorian state company for exploitation of minerals. OECD paid VAT on the costs incurred by it, and sought to recover that payment from the Ecuadorian government. The claim was refused and the dispute was referred to arbitration. The arbitrators held that they possessed jurisdiction over the dispute because it involved the observance and enforcement of terms of an investment agreement. The arbitrators awarded compensation of US$71,533,649 plus interest. Ecuador sought to challenge the award for want of jurisdiction under section 67 of the Arbitration Act 1996, and in earlier proceedings (Republic of Ecuador v Occidental Exploration & Production Co [2005] 2 Lloyd’s Rep 707) the Court of Appeal held that the principle of non-justiciability did not preclude a challenge in that the claim related to private rights. In the present case the Court of Appeal upheld Aikens J’s rulings that the section 67 appeal would be dismissed: (1) although the dispute involved a matter of taxation, ie the VAT payments, the dispute also involved a matter of taxation that “had reference to” the “performance” of the “obligations of the Contract” so that the claim fell within the exception to “matters of taxation” in Article X(2)(c); and (2) a dispute which was within the exception was subject to the BIT as a whole, including its arbitration provisions.