Occidental Exploration and Production Company v. Ecuador

Year of the award: 2004
Forum/Rules: London Court of International Arbitration (UNCITRAL arbitration rules)
Applicable investment treaty: Ecuador - United States BIT (1993)

Arbitrators:
Prof Francisco Orrego Vicuña, President
Mr Charles N. Brower
Dr Patrick Barrera Sweeney

Executive summary

"Occidental", a US company, was engaged in exploration and production of oil in Ecuador, under a 1999 contract with an Ecuadorian State-owned corporation. In 2000-2001 Occidental was regularly reimbursed amounts of VAT paid by it on purchases required for its activities. However, in mid-2001 the Ecuadorian tax authority issued resolutions denying all further applications for VAT refunds by Occidental and requiring the return of the amounts previously reimbursed - on the grounds that VAT reimbursement was already accounted for in the contract.

In 2002, Occidental instituted arbitral proceedings against Ecuador under the Ecuador - United States BIT claiming multiple violations of BIT provisions, including those on national treatment, fair and equitable treatment and full protection and security, prohibition of arbitrary or discriminatory measures and expropriation. Occidental requested to be reimbursed for all VAT amounts already paid on goods and services used for the production of oil for export, as well as for future VAT amounts (US$ 201 million in total).

The Tribunal found that the contract did not include VAT refunds, and that the Claimant was entitled to such refunds under the Ecuadorian tax legislation and the law of the Andean Community. The Tribunal found further that the treatment accorded by Ecuador to the Claimant was less favourable than that accorded to certain national investors who continued to benefit from VAT refunds, which constituted a violation of the national treatment obligation. The Tribunal also found that Ecuador's conduct violated the obligations to accord fair and equitable treatment and full protection and security. Other BIT claims were rejected.

In compensation, the Tribunal awarded the amounts of VAT paid by Occidental, whose refund was requested by it and denied by Ecuador, as well as the amounts of VAT paid by Occidental but not requested for refund. As a "conservative measure", the Tribunal reduced the total amount by 1.5% to account for possible impropriety of invoices and other defects. The Tribunal refused to award future damages, i.e. the amounts of VAT to be paid and refunded in the future, as "contingent and indeterminate". The Tribunal took measures to prevent Occidental from obtaining 'double recovery' given that domestic proceedings dealing with the same matter were still pending at the time of the arbitral award. Interest was awarded using, as a basis, Ecuadorian legislation applicable to delays of tax obligations but reduced the resultant amount by 50%.