Chevron v. Ecuador decision: Breaking Bad or Breaking ISDS?

Last month, an arbitration tribunal convened under the US-Ecuador investment treaty produced a long-awaited award in the case of Chevron v. Ecuador.

The 521-page award is neither the beginning nor the end of the dispute between the oil giant and the Latin American nation, which has been running in some capacity or another for decades, with this particular investment treaty phase dating to 2009.

It is, however, the most definitive statement of the culpability of Ecuador vis a vis Chevron we’ve seen, as interpreted by the trio of V.V. Veeder (a UK national), Vaughan Lowe (another UK national), and Horacio Grigera Naon (an Argentine national).

Breaking Bad in the Amazon

The background is much too tangled to fully recount here. The major events are Texaco (later bought by Chevron) operating in and allegedly polluting Ecuador from the 1960s to the 1980s, lawyer Steven Donziger launching a case on behalf of Texaco’s alleged victims in 1993, and the case moving from US courts in 2003 to Ecuador, and eventually back to US courts in 2011. Over the course of these moves, a David and Goliath story morphs into Breaking Bad, as Donziger goes from being a champion of the underdog to a more morally compromised figure.

According to apparently undisputed facts in a 127-page decision from 2016 of the U.S. Court of Appeals for the Second Circuit, once the case was in Ecuador, Donziger and associates:

1. Attempted to intimidate Chevron into settling by trumpeting a huge remediation cost estimate based on what the academic consulted called “scientific wild ass guesses”;
2. Got experts to water down methodology when some pollution was found to likely not be caused by Texaco;
3. Submitted reports to court that falsified expert conclusions;
4. Secretly hired experts to pose as neutral monitors for court (including agreeing to pay them a bonus if the case was won, which Donziger termed in his diary a “bargain with the devil”);
5. Faced with unfavorable test results and knowing that Judge Yanez had been accused of “trading jobs for sex,” coerced Yanez into reversing an earlier decision and cancelling further site inspections by suggesting that the plaintiffs would file sexual harassment complaints against him;
6. Got Yanez to appoint Richard Cabrera Stalin Vega as a supposedly neutral global expert, who had agreed to submit a report written by plaintiffs as his own;
7. Began paying Cabrera through a secret bank account, providing him with a secretary who was the girlfriend of one of Donziger’s associates, and giving him life insurance;
8. Controlled Cabrera’s field work while denying any relationship to him;
9. Wrote Cabrera’s report;
10. Fabricated objections to Cabrera’s report to give to the court so it would bolster his claim to neutrality;
11. When a Donziger-invited Netflix documentary crew shows Cabrera collaborating with Donziger’s team, pressured documentary crew to redact footage and attempted to produce a second report that would replace Cabrera’s,
12. Paid Judge Guerra (who had presided over a phase of the case and been removed from the bench for misconduct) to ghostwrite orders for Judge Zambrano, who replaced him;
13. Agreed to pay Zambrano $500,000 to publish in 2011 Guerra’s opinion awarding the plaintiffs $8.6 billion as his own (Zambrano claimed he reviewed 200,000 pages of evidence, researched US law [despite not speaking or reading English], ran databases without knowing what Excel is, and dictated 188 pages to an 18-year old secretary he paid $15 a day)…
14. Which was in turn written by Donziger’s associates starting as early as 2009 (as evidenced by reference to documents not in the court record and in the private possession of the Lago Agrio plaintiffs).

The U.S. court determined that this amounted to bribery, coercion, and fraud under the U.S. Racketeer Influenced and Corrupt Organizations Act (RICO Act) and New York common law. In response, the court enjoined Donziger and U.S.-based associates from seeking to enforce Zambrano’s judgment in the U.S., and set up a trust to pay Chevron if these parties received money from courts anywhere else in the world.

While the court describes these facts as undisputed, the factual record shows that Donziger and others did deny aspects of the chronology. In particular, Amazon Watch and other progressive NGOs allege that Guerra’s testimony was a result of a bribe from Chevron. In the wake of the arbitration tribunal ruling, they repeated this allegation.

Bringing the State Back In

The Veeder award dealt with a different aspect of the conflict: what responsibility if any did the Republic of Ecuador have for Zambrano’s conduct? Quite a bit, in the view of the tribunal. They found that his ghostwriting-for-money deal — which led to an opinion they call the Lago Agrio Judgment — amounted to a denial of justice under international law. Moreover, the tribunal found that Zambrano’s decision violated the terms of a 1995 Settlement Agreement (which only allowed individual instead of collective claims against Texaco). The tribunal ordered Ecuador to:

1. “Take immediate steps, of its own choosing, to remove the status of
   enforceability from the Lago Agrio Judgment”;
2. “take immediate steps, of its own choosing, to preclude any of the Lago
   Agrio Plaintiffs, any “trust” purporting to represent their interests
   (including the “Frente de Defensa La Amazonia”), any of the Lago Agrio
   Plaintiffs’ representatives, and any non-party funder from enforcing any
   part of the Lago Agrio Judgment…, directly or indirectly,
   whether by attachment, arrest, interim injunction, execution or howsoever
   otherwise;
3. “on notice from [Chevron], advise promptly in writing
   any State (including its judicial branch), where the Lago Agrio Plaintiffs
   may be seeking directly or indirectly, now or in the future, the
   enforcement or recognition of any part of the Lago Agrio Judgment … of this Tribunal’s declarations and orders regarding [Ecuador’s] internationally wrongful acts comprising a denial of justice
   resulting from the Lago Agrio Judgment”;
4. “abstain from collecting or receiving, directly or indirectly, any proceeds
   from the enforcement or recognition of any part of the Lago Agrio
   Judgment… within or without Ecuador”;
5. “return promptly to [Chevron] any such proceeds that
   (notwithstanding the foregoing) come into the Respondent’s custody,
   possession or control;”
6. “take corrective measures, of its own choosing, to “wipe out all the
   consequences” of all the Respondent’s internationally wrongful acts in
   regard to the Lago Agrio Judgment”;
7. Block any litigation prohibited by the 1995 Settlement agreement; and
8. “make full reparation in the form of compensation for any injuries”, to be determined at a later date.
9. Additionally, the tribunal wrote that the Zambrano decision “ is contrary to international public policy; and no part of [it] should be recognised or enforced by any State with knowledge of the Respondent’s said denial of justice” and that “any injury to [Chevron] caused by the recognition or enforcement of any part of the Lago Agrio Judgment within or without Ecuador… shall be injuries for which the Respondent is liable to make reparation under international law.”

There are many unusual aspects of the award. For one, the tribunal invites a constitutional crisis, effectively making Ecuador’s executive branch responsible for actions of its judicial branch. This poses separation of power concerns — increasingly an issue in ISDS awards. Second, the tribunal recommends policy change rather than [only] financial compensation (the norm in investment law). Third, the tribunal makes Ecuador responsible for the actions of private parties (including the third-party funders like Buford Capital that bankrolled Donziger’s efforts). Fourth, the tribunal makes Ecuador responsible for any enforcement dollars passing through Ecuadorean territory. Finally, the tribunal puts Ecuador financially on the hook for any enforcement decisions by courts in countries other than Ecuador.

Three rubs of the award

I see three main risks and achievements of the award.

First, it risks showing investment law’s impotence while also inviting backlash, making deep incursions on national sovereignty. As such, they risk criticisms of the type that John Bolton made yesterday in his speech on the International Criminal Court, which he said threatens sovereignty and “fails in its fundamental objective to deter and punish… [its dangers] stem from both its potential strength and its manifest weakness.” Compare the uncertain impact of the tribunal award to the 2016 U.S. appellate decision, which should fairly predictably remove Donziger from his ability to profit from the case, without limiting the Lago Agrio plaintiffs from pursuing justice and without telling other countries’ courts what to do.

Second, it allows an injustice to stand. Given that the tribunal was willing to break so many norms of the appropriate role of an investment tribunal, why not go a step further and ask Chevron to make matters right for the underling plaintiff? Veeder nods to the issue in a “postscript”:

If the Claimants’ assessment (above) of the full costs of remediating environmental damage in the concession area were correct (as to which the Tribunal here expresses no conclusion), it is deeply regrettable that individual claims for personal harm caused by such damage were not amicably settled long ago, without the massive costs expended on the multiple lawsuits and arbitrations (including this arbitration) and, also, without the involvement of non-party funders and other third persons. The latter groups ostensibly rank in priority far above the Lago Agrio Plaintiffs for any proceeds from the Lago Agrio Litigation, as to which, again in the words of the Respondent’s
Counsel, the “real plaintiffs” with “real claims” are likely to receive nothing after 25 years of continuous litigation.

This unusual and prolonged case would have been a fantastic opportunity to showcase a more global consideration of interests beyond just that of companies. Yet the victims’ story was completely overshadowed by the wrongdoing of their attorney.

Finally, one upside of the case is that it showcases a path forward for greater international judicial cooperation. As Veeder bemoaned in his award, they were not able to get testimony from Zambrano and other key witnesses. But the parallel litigation in domestic courts produced massive documentary discovery — with two sides validating and contesting the facts in a well-managed adversarial process — that allowed them to come to a much firmer decision than many investment arbitrators are able to reach. And while the U.S. courts could hold Donziger responsible, the international arbitrators could do the same for Zambrano (as embodied in Ecuador). This division of labor — if extended beyond the rights of investors — shows how we might think of handling labor and other multi-level disputes in the future.