February 23, 2012 5:16 PM

The Global Lawyer: Treaty Arbitration Clashes with Human Rights (or at least with Ecuador's Courts)

Posted by Michael D. Goldhaber

On February 16, Chevron Corporation won an arbitral award neutralizing the $18 billion Ecuadorian judgment now on appeal in that country--only to have an Ecuadorian court defy the arbitrators the next day.

After holding emergency hearings over the prior weekend, three international arbitrators sitting under the auspices of the Permanent Court of Arbitration issued an interim order, directing the Republic of Ecuador (including its judicial branch) not to certify the $18 billion judgment for enforcement.

As I noted last November, Chevron is betting heavily on this arbitration, and on its arbitral counsel at King & Spalding, to limit its exposure now that the U.S. Court of Appeals for the Second Circuit has held that U.S. courts can't enjoin the enforcement of this award. (See The Global Lawyer: Where the Second Circuit Leaves Chevron.)

However, on February 17 the intermediate Ecuadorian appellate court issued a four-page order, available in the original Spanish here, and in Chevron's unofficial English translation here. According to Chevron's translation, the court rejected the arbitrators' order as offensive to Ecuador's Constitution as well as to the Inter-American Convention on Human Rights. "A simple arbitration award, although it may bind Ecuador, cannot obligate Ecuador's judges to violate the human rights of our citizens," wrote the court. "That would not only run counter to the rights guaranteed by our Constitution, but would also violate the most important international obligations assumed by Ecuador in matters of human rights."

Further, the Ecuadorian court wrote that because Chevron did not ask to post an appeal bond, it had failed to take advantage of the only mechanism for suspending execution of a judgment. According to plaintiffs' spokesperson Karen Hinton, that means that finally, after 18 years of twisting litigation, "the rainforest communities have a final and enforceable judgment."

Chevron's position is that the $18 billion judgment is not final until it is certified by Ecuador's courts, and this also seems to be the understanding of the arbitrators, who had the benefit of formal argument from Ecuador's lawyers. Certification now seems likely to happen soon, although it remains conceivable that the Republic of Ecuador will stop short of doing what the arbitrators specifically ordered it not to do. "Chevron expects Ecuador to respect the Second Interim Award that has now been issued," said Chevron spokesperson Kent Robertson.

More fundamentally, Chevron denies the premise that it or the arbitration process has violated anyone's human rights, whether under domestic or international law. Said Robertson:"If anyone has deprived plaintiffs of justice, it is their own lawyers, who have compromised their case through fraud."

In describing a head-on collision between human rights and investment law, the new Ecuadorian ruling echoes the arguments plaintiffs recently made in this February 9 letter petition to the Inter-American Commission on Human Rights. The plaintiffs have also enlisted a group of nonprofits and a Latin American jurist in a broader campaign to question the legitimacy of the investment treaty system.

Although the flaws of investment arbitration leave the system vulnerable to such attacks, the most clear-cut collision is between treaty arbitration and Ecuador's courts. What can Chevron do in the face of Ecuador's intransigence?

In the medium term, the new arbitral ruling is a shield that Chevron can wield in its defense to the enforcement actions around the world that seem likely to follow. Of course, any enforcing court that dismisses Chevron's evidence that the plaintiffs procured their judgment through fraud might also disrespect the arbitrators. Fortunately for Chevron, the new arbitral ruling also signals that Chevron is likely to prevail on the merits of the arbitration. Ecuador may continue to ignore the arbitrators' declarations if it wishes to risk the consequences for foreign investment. But the other arbitral relief sought by Chevron--indemnification--is enforceable outside Ecuador.

Now the show resumes in New York federal court, where Chevron's racketeering action was released from a stay order on February 16. For a few hours last Friday, it was imaginable that Ecuador would exit stage right, and the curtain would fall on the most riveting spectacle in global litigation. But if we learned anything from last week, we learned that none of the main players is standing down.

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