ChevronToxico

US Court Stops Chevron Arbitration Vs State-Owned Petroecuador

By Wailin Wong, Dow Jones
20 June 2007

NEW YORK -- A U.S. District Court judge in the Southern
District of New York has stopped arbitration proceedings against Ecuadorean state-owned oil company Petroecuador by Chevron Corp. (CVX), siding with the Andean government in the latest chapter of a long-running environmental clean-up case.

In a ruling issued Tuesday, Judge Leonard Sand granted a request by Ecuador and Petroecuador for a permanent injunction of proceedings at the American Arbitration Association.

The court dispute centers on whether Chevron or Ecuador should pay for any eventual environmental clean-up in the Amazon region, where indigenous groups say oil drilling by Chevron decades earlier had damaged the land. While
the liability issue isn't yet resolved, the Tuesday ruling is a setback for Chevron.

In a statement, Chevron said it was "disappointed" in the Tuesday decision but is "confident that Petroecuador and the Republic of Ecuador will be compelled to fulfill their obligations both to indemnify us for any costs associated with the underlying litigation in Ecuador, and to step up to their responsibility for any and all environmental issues that may exist in the former concession areas. "Chevron also said it's "considering issues for appeal."

The "underlying litigation" in Ecuador refers to a May 2003
lawsuit that several indigenous groups filed against Texaco Petroleum Co. in Lago Agrio, Ecuador. That case is still pending. Texaco operated under its own brand in Ecuador before exiting the country in 1992. It merged with Chevron in 2001.

Chevron started arbitration proceedings against Ecuador in June 2004. In October 2004, the Andean government sued in New York Supreme Court to stop the arbitration, and the case was later moved to the Southern District of New York.

Sand's Tuesday ruling hinged on whether an Ecuadorean court would find a 1965 joint operating agreement binding on Petroecuador. The 1965 agreement was signed in Florida between Gulf Oil Co. and Texaco. In 1974, Petroecuador's predecessor, Compania Estatal Petrolera Ecuatoriana, took over Gulf Oil's ownership interest in the joint venture but never signed the 1965 agreement.

Three years later, CEPE bought out the rest of Gulf's stake. Texaco and Petroecuador operated the oilfields together between 1977 and 1991. The 1965 agreement, which neither Ecuador nor Petroecuador ever signed, contained an arbitration provision. Subsequent documents, such as the government decree that had CEPE take over Gulf Oil's ownership interest, didn't have arbitration clauses.

Chevron has argued in court that because Petroecuador benefitted from the 1965 joint operating agreement, the state-owned oil company was an implicit party and
thus bound to the terms of the agreement.

However, after examining several aspects of Ecuadorean law related to government contracts, Sand sided with Ecuador's contention that local law wouldn't bind Petroecuador to the 1965 agreement. This finding was the basis for his decision to stop the arbitration proceedings.

"Even in Chevron's best-case scenario, it still cannot show that under (Ecuadorean) law CEPE or Petroecuador would have the JOA enforced against it because there would be a lack of any reasonable expectation by Chevron that the JOA had continuing validity," the ruling said.

Not Over Yet

Despite the initial setback, Chevron noted in its statement the New York court didn't rule on its counterclaim against Ecuador. This counterclaim centers on a 1995 settlement between U.S. company and Petroecuador, when Texaco agreed to do some environmental clean-up in exchange for a release of claims by Ecuador and Petroecuador. Chevron has said that in 1998, the government released it from any liabilities regarding clean-up efforts.

The court is giving both sides 60 days "to evaluate their posture and confer with each other" on the counterclaim issue, then tell the court "what further proceedings, if any, they intend to pursue before this court," the ruling said.

Eric Bloom of Winston & Strawn LLP, which represented Ecuador, told Dow Jones Newswires Wednesday that "we'll take our time evaluating" the issue of the counterclaim.

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