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Friday 14 October 2016

Public Policy Through the Lens of Chevron v. Ecuador - Litigation Committee newsletter article, October 2016

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Public policy through the lens of Chevron v. Ecuador

 

Floriane Lavaud, Debevoise & Plimpton, New York
flavaud@debevoise.com

Laura Sinisterra, Debevoise & Plimpton, New York
lsinisterra@debevoise.com

Julianne J. Marley, Debevoise & Plimpton, New York
jjmarley@debevoise.com

 

In an epic legal battle between Chevron and Ecuador over alleged environmental contamination in the Amazon region, a United States court declared that an Ecuadorian judgment in excess of $8.6bn against Chevron was fraudulent and unenforceable, a decision that was recently affirmed by the US Court of Appeals for the Second Circuit. While public policy has become an important element in the parties’ multi-jurisdictional dispute, it remains to be seen how important a role public policy and the US judgment will ultimately play in the ongoing enforcement and other proceedings.

Background

The Chevron v. Ecuador saga began in 2003, when Ecuadorian citizens instituted proceedings against Chevron before a local court in Lago Agrio for environmental damage allegedly caused by Texaco (now Chevron’s subsidiary) during its operations in the Amazon region. In 2011, the Lago Agrio court ordered Chevron to pay $8.646bn in damages and costs to the plaintiffs (the ‘Lago Agrio judgment’).[1] The plaintiffs subsequently sought to enforce the Lago Agrio judgment in Canada, Argentina and Brazil. 

Chevron, for its part, brought suit under the US Racketeer Influenced and Corrupt Organizations (‘RICO’) Act against several plaintiffs and their attorney, Stephen Donziger, in the Southern District of New York (‘SDNY’), alleging that the Lago Agrio judgment was procured fraudulently. Chevron initially sought damages and a global injunction prohibiting the plaintiffs and Ecuador from enforcing the judgment, but subsequently waived its claim for damages.

In 2014, the District Court ruled in Chevron’s favour and barred enforcement of the Lago Agrio judgment in the United States (the ‘SDNY judgment’).[2]  The Court found that the judgment was the product of fraud and racketeering activity, including bribery, witness tampering, money laundering, extortion and obstruction of justice. It specifically found that the plaintiffs’ team had arranged for the ghostwriting of a decisive court-appointed expert report, several court orders and the Lago Agrio judgment itself.[3] It also found that the Lago Agrio judge had been promised a $500,000 bribe, and that Donziger had coerced another Lago Agrio judge to cancel certain site inspections and appoint an individual being paid by the plaintiffs’ team as a supposedly neutral expert.[4] As such, the court held that ‘the wrongful actions of Donziger and his Ecuadorian legal team would be offensive to the laws of any nation that aspires to the rule of law, including Ecuador . . . .’[5]

More recently, the US Court of Appeals for the Second Circuit affirmed the SDNY judgment.[6] On appeal, the plaintiffs argued that the RICO action should have been dismissed, either for lack of standing or mootness and that the judgment should be reversed on the basis, inter alia,that it exceeds any legal authorisation for equitable relief and violates international comity.[7] Notably, however, the plaintiffs did not challenge the sufficiency of the evidence to support the District Court’s factual findings relating to the fraud.[8] The Second Circuit denied each of these grounds for appeal, stressing at the outset that the District Court’s factual findings were not the subject of challenge.[9]

While it did not formally assess the SDNY judgment’s factual findings as to the fraud, the Second Circuit devoted the first 74 pages of its 127 page opinion to a detailed description of the facts of the case based on the evidence credited by the District Court’s factual findings. In doing so, it noted that ‘the record in the present case reveals a parade of corrupt actions by the [plaintiffs’] legal team, including coercion, fraud, and bribery.’[10]

The Second Circuit also concluded that the anti-enforcement injunction within the US granted to Chevron was a permissible remedy for a claim brought by a private plaintiff under RICO, as well as an appropriate grant of relief under New York common law.[11] It noted that, notwithstanding the ‘strong interest in the finality of judgments,’ ‘New York common law has long recognized that equitable relief may be granted to a person victimized by the procurement of a judgment through fraud that is extrinsic to the gravamen of the cause of action,’ and that such equitable relief may be granted by a court that has jurisdiction over the parties, even if the fraudulent judgment was entered in a different jurisdiction.[12]

Finally, the Second Circuit rejected the plaintiffs’ argument that the District Court’s judgment ‘violates principles of international comity’. It noted that the anti-enforcement injunction ordered by the District Court ‘is limited to the United States.’[13] Further, it noted that the Ecuadorian courts had ‘expressly disclaimed jurisdiction to address the corruption claims and stated that the matter is preserved for adjudication in the United States courts’.[14] Thus, the Second Circuit held that international comity did not bar the District Court’s judgment.[15]

In a parallel UNCITRAL arbitration that commenced in 2009, Chevron sought declaratory relief to be released from all environmental liability for Texaco’s operations and to hold Ecuador responsible for any remaining remediation work.[16] In 2012, the arbitral tribunal rendered interim awards ordering Ecuador to take all measures at its disposal to suspend enforcement of the Lago Agrio judgment.[17] Ecuador sought to set aside these awards in the Netherlands, but the District Court of The Hague rejected Ecuador’s action in January 2016.[18] The District Court’s decision is currently on appeal.

Public policy as a defence to enforcement of foreign judgments

There is no widely adopted global convention governing the enforcement of foreign judgments. There are only regional conventions, such as the Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards. This convention, which was adopted by, inter alia, Argentina, Brazil and Ecuador, provides an exception to enforcement where judgments are ‘manifestly contrary to the principles and laws of the public policy of the state where recognition or execution of the judgment is sought’.[19]

Domestic law often also governs enforcement of foreign judgments, and the bases for denying enforcement. The four relevant jurisdictions here (the US, Canada, Argentina and Brazil) have adopted provisions allowing courts to deny enforcement of foreign judgments obtained by fraud or other illegal means.

In both the US and Canada, fraud is a defense to recognition and enforcement of foreign judgments. Specifically, in the US, the 1962 Uniform Foreign Money-Judgments Recognition Act[20] and the revised 2005 Uniform Foreign-Country Money Judgments Recognition Act[21]provide an exception to enforcement where the judgment was obtained through fraud. In Canada, there are three limited defenses to enforcement of a foreign judgment under provincial law:  fraud, denial of natural justice, and public policy.[22]

In Brazil and Argentina, fraud is not a specific defense against the recognition and enforcement of a foreign judgment. Fraud allegations thus fall under the broader umbrella of public policy. Brazilian law, for example, provides that the Superior Court of Justice, which has subject matter jurisdictionover enforcement proceedings, will not grant exequatur where the foreign judgment ‘violates sovereignty or public policy’.[23]Similarly, Argentine law provides that a foreign judgment can be enforced only if it ‘does not violate the principles of public policy of Argentine law’.[24]

Impact of the SDNY judgment

The purpose of the SDNY judgment, and the anti-enforcement injunction granted therein, was not to bar the enforcement of the Lago Agrio judgment worldwide.  As Judge Kaplan of the District Court stated, the SDNY judgment does not:

Grant worldwide injunction barring any efforts to enforce the Judgment in other countries.  And it does not, as Donziger claims, issue ‘a worldwide anti-collection injunction’.  It prevents the three defendants who appeared at trial – over whom it has personal jurisdiction – from profiting from their fraud.[25]

However, notwithstanding the lack of formal legal effect outside the US, the SDNY judgment may nevertheless affect the enforcement of the Lago Agrio judgment in other jurisdictions.

In Brazil, while the enforcement proceeding is still pending,[26] the SDNY judgment has already had some impact. In May 2015, the Brazilian Prosecutor General issued an opinion recommending that the Superior Court of Justice reject the Lago Agrio judgment for largely the same reasons that the US District Court deemed it unenforceable, citing the SDNY judgment at length.[27] Interestingly, the Prosecutor General’s opinion drew on the SDNY findings as persuasive evidence of illegality tainting the Lago Agrio judgment, a violation of international public policy that Brazilian courts should not condone.

The SDNY judgment may also potentially bar enforcement of the Lago Agrio judgment in Canada, where the Supreme Court affirmed the Ontario courts’ jurisdiction to hear the case in September 2015.[28] In its Statement of Defense filed in the Ontario Superior Court, Chevron opposed enforcement on the grounds of denial of ‘fairness and natural justice,’ alleging, inter alia, that the judgment ‘was obtained by fraudulent means and rendered by a systemically corrupt and biased court’.[29] Chevron also argued that ‘plaintiffs are bound by the factual findings made by the SDNY’.[30] Unsurprisingly, the plaintiffs reject this argument and point to the limited territorial scope of the SDNY judgment.[31]  

In Argentina, the SDNY judgment’s impact remains to be tested as the courts have thus far ruled only on procedural matters, and it appears the Lago Agrio plaintiffs are not currently further pursuing their enforcement action against Chevron in that country.[32] In November 2012, an Argentine judge ordered enforcement against approximately $19bn worth of assets owned by Chevron in Argentina. However, in June 2013, Argentina’s Supreme Court issued an order releasing these assets.[33] The Court’s ruling, which predates the SDNY judgment, rested on procedural grounds unrelated to the validity of the underlying Lago Agrio judgment and as such did not discuss Chevron’s fraud allegations. 

The SDNY judgment has had some impact not only in ongoing enforcement proceedings, but also in the decision rendered by the District Court of The Hague. In rejecting Ecuador’s attempt to set aside the interim awards rendered by the arbitral tribunal, the District Court parsed the SDNY judgment and relied heavily on its ‘confirmation' of the fraud allegations.[34] Similarly, the District Court pointed to the link between the arbitral tribunal’s interim awards and Chevron’s fraud allegations:

The interim measures taken by the tribunal cannot be explained otherwise than by the fact that at the time those measures were taken, the tribunal apparently had serious indications that the judgment rendered at first instance in the Lago Agrio proceedings . . . came into being fraudulently.[35]

In addition, the arbitral tribunal in the ongoing UNCITRAL arbitration proceeding recently entered the Second Circuit’s decision as an exhibit to those proceedings, upon Chevron’s request. In doing so, the tribunal noted that ‘the legal issues and the respondent parties in these US proceedings remain materially different from [Ecuador] and the legal issues before this Tribunal,’ and thus that no issue estoppel or res judicata could arise from the Second Circuit decision.[36]

The interrelation between the different proceedings raises interesting questions that are likely to depend not only on local substantive rules relating to enforcement of foreign judgments, but also on the local courts’ willingness to adopt or consider findings from a foreign court. 

While the Second Circuit’s recent affirmation of the SDNY judgment has not yet played a role in any of the pending enforcement actions, it draws attention to two issues in particular that may affect other courts’ reliance on the SDNY judgment’s factual findings: first, that the plaintiffs did not challenge the evidence underlying the factual findings on appeal; and second, that the Ecuadorian appellate courts had explicitly declined jurisdiction on the fraud allegations and preserved the parties’ rights to have those issues litigated in the US.  

Conclusion

The battle between Chevron and Ecuador is far from over. As the saga continues to unfold, it will surely serve to illustrate not only the differences across jurisdictions in public policy defences to enforcement of foreign judgments, but also the potential cross-border impact of the SDNY judgment, and its recent affirmation by the Second Circuit, on such defences.

 

Notes


[1] The Lago Agrio court also initially ordered an additional USD 8.646 billion in punitive damages unless Chevron issued an apology, but this aspect of the judgment was eliminated on appeal.

[2]  Chevron Corp. v. Donziger, 974 F. Supp. 2d 362 (S.D.N.Y. 2014).

[3] Id. at 511–513.                                                                                                                    

[4] Id. at 420–422, 533.

[5] Id. at 386.

[6] Chevron Corp. v. Donziger, No. 14-826(L), 2016 WL 4173988 (2d Cir. Aug. 8, 2016).

[7] Id. at *1.

[8] Id.

[9] Id.

[10] Id. at *42.

[11] Because there were no RICO claims asserted against the Lago Agrio plaintiffs, the District Court had based its grant of equitable relief against the Lago Agrio plaintiffs’ representatives on principles of common law.  See id. at *55.

[12]  Id.

[13] Id. at *58.

[14] Id. at *58–59.

[15] Id.

[16] Chevron Corp. and Texaco Petroleum Corp. v. The Republic of Ecuador, UNCITRAL, PCA Case No. 2009-23.

[17] Id., First Interim Award on Interim Measures of  Jan. 25, 2012; id.,Second Interim Award on Interim Measures of Feb. 16, 2012; see also id.,Fourth Interim Award on Interim Measures of Feb. 7, 2013.

[18] The Republic of Ecuador v. Chevron Corp. and Texaco Petroleum Corp., District Court of The Hague, C/09/477457/HA ZA 14-1291 (Jan. 20, 2016).

[19] Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards (1979), Art. 2(h).

[20] Uniform Foreign Money-Judgments Recognition Act (1962), § 4(b)(2), providing that “A foreign judgment need not be recognized if . . . the judgment was obtained by fraud.”

[21] Uniform Foreign-Country Money Judgments Recognition Act (2005), § 4(c)(2), (3) (providing exceptions to enforcement where “the judgment was obtained by fraud that deprived the losing party of an adequate opportunity to present its case” and where “the judgment or the [cause of action] [claim for relief] on which the judgment is based is repugnant to the public policy of this state or of the United States.”).  A public policy exception to enforcement also exists at common law.  See Hilton v. Guyot, 159 U.S. 113, 163–65 (1895).

[22] Beals v. Saldanha, 2003 SCC 72, [2003] 3 S.C.R. 416 (S.C.C.).

[23] Article 216-F of the Superior Court of Justice’s Internal Rules also provides that foreign judgments will not be recognized and enforced where they violate “national sovereignty, human dignity and/or public policy.”  Likewise, Article 17 of Decree-Law No. 4657 (1942) provides that “laws, acts and judgments of another country . . . will not be granted effect in Brazil when they violate national sovereignty, public policy or morality.”

[24] Argentina, Code of Civil and Commercial Procedure, Art. 517.

[25] Chevron, 974 F. Supp. at 644.

[26] Superior Court of Justice, Special Court, SEC (Foreign Judgment Enforcement Proceedings) No. 8,542/EC, Judge Felix Fischer.

[27] Id.  Opinion No. 2811, Deputy Prosecutor General Nicolao Dino (May 11, 2015).

[28] Chevron Corp. v. Yaiguaje, 2015 SCC 42, [2015] 3 S.C.R. 69 (Sept. 4, 2015).

[29] Chevron Corp. v. Yaiguaje, Ont. Sup. Ct. of Justice, No. CV-12-9808-00CL, Chevron Statement of Defense (Oct. 2, 2015),3.

[30] Id. ¶ 4.

[31] Chevron Corp. v. Yaiguaje, Ont. Sup. Ct. of Justice, Court File No. CV-12-9808-00CL, Plaintiffs Reply (Oct. 20, 2015), ¶¶ 40–43.

[32] See Opinion: Donziger’s Case Against Chevron, In His Own Words, Law360, Apr. 15, 2015.

[33] Aguinda Salazar, Maria v. Chevron Corporation s/ provisional measures, A. 253 XLIX, A. 238, XLIX, Supreme Court of Justice, Argentina, June 4, 2013.

[34] The Republic of Ecuador v. Chevron Corp. and Texaco Petroleum Corp., District Court of The Hague, C/09/477457/HA ZA 14-1291 (Jan. 20, 2016), at p. 15.

[35] Id.

[36] Chevron Corp. and Texaco Petroleum Corp. v. The Republic of Ecuador, UNCITRAL, PCA Case No. 2009-23, Procedural Order No. 45 of Aug. 29, 2016.

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