World Trade and Arbitration Materials

132 Pages·2008·4.09 MB·English

by  Kluwer Law International

International Centre for Settlement of Investment Disputes
DUKE ENERGY ELECTROQUIL PARTNERS
&
ELECTROQUIL S.A.
(“Duke”)
CLAIMANTS
v.
REPUBLIC OF ECUADOR
(“Ecuador”)
RESPONDENT
ICSID Case No. ARB/04/19
AWARD
Rendered by an Arbitral Tribunal composed of:
Prof. Gabrielle Kaufmann-Kohler, President
Dr. Enrique Gómez Pinzón, Arbitrator
Prof. Albert Jan van den Berg, Arbitrator
Secretary of the Tribunal:
Mr. Gonzalo Flores
Date of Dispatch to the Parties: August 18, 2008
189
190
TABLE OF CONTENTS
TABLE OF ABBREVIATIONS ............................................................................4
I. Facts ..............................................................................................................6
1. The Parties ............................................................................................6
1.1 The Claimants .........................................................................6
1.2 The Respondent .......................................................................6
2. Factual background ............................................................................7
2.1 The Energy Crisis in Ecuador ......................................................7
2.2 The Subscription of the PPAs and Other Related Agreements ...............8
2.3 The Payments under the PPAs and the Constitution of the
Payment Trusts .......................................................................11
2.4 The Fines Imposed During the Execution of the PPAs .....................12
2.5 Duke Energy’s Indirect Involvement in the PPAs Through its
Investment in Electroquil ...........................................................14
2.6 Ecuador’s Direct Involvement in the PPAs .....................................14
2.7 The Med-Arb Agreements .........................................................15
2.8 The Liquidation of the PPAs and Related Agreements ......................16
2.9 The Proceedings Relating to Customs Duties Exemptions ..................17
II. Procedural History ......................................................................................19
1. Initial Phase .......................................................................................19
2. Pre-Hearing Written Phase ...............................................................20
3. Hearing ...............................................................................................21
4. Post-Hearing Written Phase .............................................................22
III. Parties’ Positions ..........................................................................................23
1. Parties’ Positions on Jurisdiction .....................................................23
1.1 Ecuador’s Objections to Jurisdiction ....................................................23
1.2 Duke’s Response to Ecuador’s Objections to Jurisdiction........................24
2. Parties’ positions on the merits ........................................................24
2.1 Duke’s Position ...............................................................................24
2.1.1 Duke’s Arguments ................................................................24
2.1.2 Duke’s Prayers for Relief .......................................................25
2.2 Ecuador’s position on the merits ..............................................26
2.2.1 Ecuador’s Arguments .............................................................26
2.2.2 Ecuador’s Prayers for Relief ...................................................26
IV. Analysis .........................................................................................................27
1. Preliminary observations ....................................................................27
2. Jurisdiction ........................................................................................28
2.1 Tribunal’s Jurisdiction Under the Arbitration Agreement ........................29
2.1.1 The scope of the Arbitration Agreement ...................................30
a) Defi nition of the Issue ..............................................30
b) Parties’ Positions .....................................................31
c) Tribunal’s Determination ...........................................31
191
2.1.2 ICSID Jurisdictional Requirements .........................................36
2.2 Alternative Jurisdiction Under the BIT...............................................37
2.2.1 Parties’ Positions ..................................................................37
2.2.2 Tribunal’s Determination .......................................................38
a) The Late Invocation of the BIT ..................................39
b) Combined Jurisdictional Bases .....................................39
c) The Implementation of the Payment Trusts and the
Scope of the BIT ....................................................41
d) Customs Duties and the Scope of the BIT on Matters
of Taxation ............................................................42
3. Applicable Law ..............................................................................................46
3.1 Parties’ Positions .............................................................................47
3.2 Tribunal’s Determination ..................................................................47
3.2.1 Applicable law .....................................................................47
3.2.2 Application Ratione Personae/Temporis of the BIT ..................48
4. Merits ...........................................................................................................49
4.1 Did Ecuador Breach the PPAs and Ecuadorian Law? ..........................50
4.1.1 Claims for Violation of the Payment Obligations ......................50
a) Parties’ Positions .....................................................50
b) Tribunal’s Determination ...........................................52
4.1.2 Claims for Interest on Late Payments .....................................59
a) Is Interest Due? ......................................................60
b) Alleged “Waiver” to Claim Interest ..............................64
4.1.3 Fines and Penalties Imposed During the Execution of
the PPAs ............................................................................66
a) Parties’ Positions .....................................................66
b) Contractual Regime ..................................................67
c) Tribunal’s Review of the Fines ....................................69
4.1.4 The Med-Arb Agreements and the Local Arbitration .................82
a) Parties’ Positions .....................................................82
b) Tribunal’s Determination ...........................................82
4.1.5 Did Ecuador Fail to Act in Good Faith? ................................85
a) Parties’ Positions .....................................................85
b) Tribunal’s Determination ...........................................86
4.2 Did Ecuador Violate the BIT? ..........................................................86
4.2.1 Issues to be Determined ........................................................86
4.2.2 Did Ecuador violate the duty to observe obligations entered into
with respect to the investment (Art. II(3)(c) of the BIT)? ..........87
a) Parties’ Positions .....................................................87
b) Tribunal’s Determination ...........................................88
192
4.2.3 Did Ecuador Violate the Duty of Fair and Equitable
Treatment (Art. II(3)(a)of the BIT)? ......................................90
a) Parties’ Positions .....................................................90
b) Applicable Standard .................................................91
c) Tribunal’s Determination ...........................................95
4.2.4 Did Ecuador Violate the Duty not to Impair the
Investment by Arbitrary Conduct (Art. II(3)(b) of
the BIT)? .........................................................................100
a) Parties’ Positions ...................................................100
b) Applicable Standard ...............................................101
c) Tribunal’s Determination .........................................103
4.2.5 Did Ecuador Violate the Duty to Provide Effective Means
of Asserting Claims (Article II(7) of the BIT)? ......................103
a) Parties’ Positions ...................................................103
b) Tribunal’s Determination .........................................105
4.3 Damages ......................................................................................109
4.3.1 Parties’ Positions ................................................................109
a) Claimants’ Position ................................................109
b) Respondent’s Position .............................................114
4.3.2 The Tribunal’s Analysis .......................................................118
a) Applicable Law .....................................................118
b) Consequences of the Violation of the PPAs and
Ecuadorian Law ....................................................118
c) Consequences of the violations of the BIT Standards .......123
d) Currency of the Award ............................................126
e) Benefi ciary of the Award ..........................................127
4.4 Costs .........................................................................................127
V. RELIEF .......................................................................................................128
193
194
TABLE OF ABBREVIATIONS
Arbitration Rules ICSID Rules of Procedure for Arbitration Proceedings
BIT B ilateral investment treaty; specifi cally “Agreement Between the
United States of America and the Republic of Ecuador Concerning
the Reciprocal Promotion and Protection of Investments” of
27 August 1993
Cl. Exh. Claimants’ Exhibit [Documentary evidence & legal materials]
Cl. 1st PHB/2nd PHB Claimants’ First Post-Hearing Brief of 30 June 2006 / Second Post-
Hearing Brief of 21 July 2006
Cl. Mem. Claimants’ Memorial in Chief of 2 September 2005
Cl. Rejoinder Claimants’ Rejoinder on Jurisdiction of 31 March 2006
Cl. Reply Claimants’ Reply Memorial and Counter-Memorial on Jurisdiction
of 18 January 2006
ER Expert Report
Exh. C- Claimants’ Exhibit [Request for Arbitration]
ICSID International Centre for Settlement of Investment Disputes
ICSID Convention Convention on the Settlement of Investment Disputes between
States and Nationals of other States
MEM Ministry of Energy and Mines
PPAs Power Purchase Agreements (PPA 95 and PPA 96)
R. 1st PHB/2nd PHB Respondent’s First Post-Hearing Brief of 30 June 2006 / Second
Post-Hearing Brief of 21 July 2006
R. Answer Respondent’s Answer to the Memorial in Chief of 22 November
2005 (“Memorial de Contestación a la Demanda”)
R. Exh. Respondent’s Exhibit [Documentary evidence & legal materials]
R. Reply Respondent’s Reply on Jurisdiction and Rejoinder on the merits of
6 March 2006
RforA Request for Arbitration
Tr. T ranscript of the Hearing of 24-28 April 2006
WS Witness Statement
195
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Page 6
I. Facts
1. This chapter summarizes the main facts of this dispute. Additional facts may be
addressed in the chapter entitled “Analysis” as and when appropriate.
1. The Parties
1.1 The Claimants
2. The Claimants in these proceedings are (i) Duke Energy Electroquil Partners (“Duke
Energy” or the “First Claimant”) and (ii) Electroquil S.A. (“Electroquil” or the “Second
Claimant”) (collectively “Duke” or the “Claimants”).
3. The fi rst Claimant, Duke Energy, is a partnership created and incorporated under the
laws of the State of Delaware, USA (Exh. C-4 RforA). Its registered offi ce is located at
5400 Westheimer Ct. 77056-5310, PO Box 1642, Houston, Texas, USA.
4. Duke Energy is the sole parent company of Duke Energy International del Ecuador
Cía Ltda (“Duke Ecuador” or “DEI”), through which it acquired an ownership interest
in Electroquil, on 23 February 1998.
5. The second Claimant, Electroquil, is a power generation company created and
incorporated under the laws of Ecuador. Its registered offi ce is located at Calle José
Salcedo, no. 410, Guayaquil, Ecuador (Exh. C-5 RforA).
6. The Claimants are represented in this arbitration by Mr. Arif H. Ali and Mr. Baiju
S. Vasani, Crowell & Moring L.L.P; Mr. C. Mark Baker, Mr. Anibal Sabater, Ms. Caroline
M. Mew, Ms. Hdeel Abdelhady and Mr. David Chung, Fulbright & Jaworski L.L.P, and
Dr. César Coronel and Dr. Hernán Pérez Loose, Coronel y Pérez Abogados, Guayaquil.
1.2 The Respondent
7. The Respondent is the Republic of Ecuador (“Ecuador” or the “Respondent”).
8. The Respondent is represented in this arbitration by Dr. Diego García Carrión,
Procurador del Estado de la República del Ecuador, Mr. Alberto Wray Espinosa,
Mr. Ernesto Albán Ricaurte, Mr. Alvaro Galindo, Estudio Jurídico Cabezas y Wray, Quito;
and Mr. Robert Volterra, Latham & Watkins, London.
197
Page 7
2. Factual background
9. The present dispute arises out of several contracts entered into between the parties
for electrical power generation in Ecuador. For the sake of clarity and expediency, the
Tribunal will address the factual background thematically, each topic being developed
chronologically, whenever possible.
2.1 The Energy Crisis in Ecuador
10. In 1973, the Government of Ecuador established the Instituto Ecuatoriano de
Electrifi cación (“INECEL”) pursuant to the Basis Electricity Law of 1973, as a state-
owned entity under the Ministry of Natural Resources and Energy, to carry out the
functions of power generation, transmission, and distribution (Exh. C-11 RforA; Cl. Exh.
028). INECEL was the only entity authorized to produce and provide electricity.
11. The electricity sector began to deteriorate and, in 1992, a crisis resulted in a
national power shortage (Exh. C-10 RforA). This event prompted Ecuador to issue the
First Emergency Decree No. 3071 (the “First Emergency Decree”) on 7 February 1992,
declaring a state of emergency “because of the shortfall in power generation, due to the scarcity
of rainfall” (Art. 1) and ordering the Ministry of Finance to allocate funds to enable
INECEL to purchase energy (Cl. Exh. 002).
12. “In the midst of and in response” to the electricity crisis (RforA, ¶ 18), Electroquil
was created on 10 January 1992 (Exh. C-5 RforA, R. Exh. 003). It was the fi rst private
power generator established in Ecuador and the only private generator in the Guayaquil
area. Mr. Gustavo Larrea Real became Electroquil’s Executive President in 1992 upon
the request of his former employer, La Cemento Nacional, which was a large electricity
consumer and a stakeholder of Electroquil.
13. In the month following its creation on 9 February 1992, Electroquil established
the fi rst non-hydro thermal power generation facility in Ecuador, located in the city of
Guayaquil.
14. Three and a half years later, on 3 October 1995, the President of the Republic
of Ecuador issued a Second Emergency Decree No. 3099 (the “Second Emergency
Decree”). The Second Emergency Decree, in particular, reinstated the state of emergency
and authorized INECEL to execute power purchase agreements on an emergency basis
with private power generators to respond to the pressing demand for electricity (Exh.
C-15 RforA; Cl. Exh. 004).
198