In 2006 Ecuador unlawfully expropriated Occidental’s interests in Block 15 in the Ecuadorian Amazon region by declaring the caducidad of its participation contract. Occidental immediately commenced ICSID arbitration pursuant to the US-Ecuador bilateral investment treaty to pursue compensation. Ecuador sought to justify the contract termination on the allegation that Occidental several years earlier had failed to obtain government consent for a farmout arrangement that gave a 40% economic interest in Block 15 to another company. Occidental argued that it had not violated any such domestic law consent requirement but that in any event international law proscribed the radical sanction of contract termination as disproportionate where Ecuador suffered no prejudice from the alleged non-compliance. The ICSID tribunal accepted Occidental’s international law argument of proportionality and in a milestone decision unanimously found that, by imposing a disproportionate sanction, Ecuador had unlawfully expropriated its interest in Block 15.
Ecuador also sought to radically diminish the quantum of Occidental’s claim by arguing that the value of its interest should be reduced on account of a windfall profit tax law that Ecuador had enacted shortly before the expropriation. Occidental argued that the windfall profit tax law was itself in breach of Ecuador’s obligations under the participation contract and under principles of international law therefore had to be disregarded for quantum purposes. The ICSID tribunal accepted by majority Occidental’s argument and refused to reduce quantum on that basis.
Ecuador sought to annul the final award but the annulment committee appointed by ICSID upheld each of the foregoing findings by the tribunal, reducing quantum only on account of the 40% economic interest held by a third party farmee.