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Oscar A Del Brutto
Coronel & Perez , Ecuador
odelbrutto@coronelyperez.com

Burlington[1]and Perenco[2] are two investment arbitrations arising out of the same set of facts and in which similar legal claims were made. Burlington, an American corporation, and Perenco, a French corporation, operated a joint venture for oil exploitation in the Ecuadorian Amazon region between 2001 and 2009. For oil exploitation, the Government of Ecuador has divided the Amazon region into areas known as ‘Blocks’. The Burlington-Perenco joint venture began operating Blocks 7 and 21 under investment contracts signed with the Republic of Ecuador and some State-owned enterprises.

The joint venture was affected by a change in the applicable Ecuadorian legislation. A 2006 reform to the Hydrocarbons Law and a 2007 Executive Decree modified the way in which the surplus of the oil price was to be distributed between Government and the companies: from 50 per cent and 50 per cent, prior to the reform, to 99 per cent and 1 per cent in favour of Ecuador, after the reform. The investors understood that these legal changes constituted a violation of Ecuador´s obligations under the investment treaties it had signed with the United States and with France, and initiated arbitration proceedings.

Two interesting things happened in these arbitrations. The first is that, despite the fact that the investors worked together in the same oil operation and that they wanted their claims to be accumulated in a single arbitration, the tribunals accepted to conduct two separate arbitrations at the request of Ecuador. Second, for the first time in the modern history of investment arbitration, a State successfully filed a counterclaim against an investor for environmental damage.

The decisions on these two counterclaims raise several important legal issues. A particularly salient one is that, despite the fact that the two tribunals were analysing the same facts, the same law and similar legal claims, they reached different conclusions regarding the scope of Ecuadorian environmental law.

Environmental damage counterclaims

During the time the Burlington-Perenco joint venture operated in Ecuador, Ecuadorian environmental legislation underwent important changes. Historically, civil liability for environmental damage did not have its own regulation and was therefore subject to the general rules of the Ecuadorian Civil Code. Under those rules, the plaintiff in a civil liability claim must prove that (1) there was a harm to his person or property; (2) the defendant acted negligently or with wrongful intention; and, (3) there was a causal relationship between the defendant´s actions and the harm suffered by the plaintiff. In some special circumstances (such as when a person is manipulating explosives and an accident occurs), the Civil Code establishes a rebuttable presumption of negligence, shifting to the defendant the burden of proving that he acted with due diligence.[3] Additionally, the Civil Code establishes a four-year statute of limitations for these claims.

The legal landscape began to change in 1999 when the Ley de Gestión Ambiental (Environmental Management Law) was approved. Among other things, this statute allowed private parties to seek compensation for the harm to the diffuse right to a healthy environment. In 2002, Delfina Torres v. Petroecuador, a well-known ruling of the Ecuadorian Supreme Court, applied a provision of the Civil Code to establish a rebuttable presumption of negligence in civil liability cases that deal with damages caused in the context of oil exploitation. Later, in 2008, the new Constitution established a strict liability regime for environmental liability cases and prescribed that environmental damages claims were not subject to any statute of limitations.

In order to decide the counterclaims raised by Ecuador, the tribunals in Perenco and Burlington had to apply Ecuadorian law. This task involved, on the one hand, deciding which law was applicable, taking into account the rule of non-retroactivity of the law; and, on the other hand, determining the scope of environmental liability in Ecuador. Since environmental law is relatively new and especially given the recent changes that had undergone in Ecuador, this task had not been carried out by Ecuadorian courts.

In Burlington, the arbitral tribunal accepted Ecuador's counterclaim and awarded damages for USD 41,776,492.77. The tribunal held that events that occurred prior to 2008 were governed by the Civil Code and Delfina Torres. The tribunal understood that according to Delfina Torres, before 2008 there was a strict liability regime, which meant that the plaintiff only had the burden of proving the harm, that the defendant's diligence was irrelevant and that the causal relationship was presumed.

Also, for events that occurred before 2008, the Burlington tribunal concluded that the applicable statute of limitations was the four-year period established in the Civil Code. The tribunal took into account the Ecuadorian rule according to which changes in procedural laws are immediately applicable even with respect to events taking place prior to those changes, but changes to a substantive law cannot be applied to prior events. The tribunal held that the statute of limitations was a substantive issue and, therefore, did not apply the 2008 Constitution.

The tribunal held that events that occurred after 2008 were governed by the 2008 Constitution. According to the tribunal, under the 2008 Constitution, there was also a strict liability regime in environmental liability cases, similar to that established in Delfina Torres, except that the burden of proof of the absence of harm fell on the defendant. As a result, for events that occurred after 2008, the defendant carried the burden of proving both the absence of harm and the absence of a causal relationship, and the negligence element was irrelevant. In addition, the tribunal concluded that no limitations period applied to events that occurred after 2008.

In Perenco, the arbitral tribunal accepted Ecuador's counterclaim and awarded damages for USD 60,715,670.00. As in Burlington, the tribunal determined that, for events that occurred prior to 2008, the applicable regime was that of the Civil Code. However, unlike in Burlington, the tribunal understood that, prior to 2008, Ecuadorian law established a negligence regime, and that Delfina Torres had only shifted the burden of proof of negligence to the defendant but had not introduced a strict liability regime with a presumption of causation. As a consequence, under Perenco, in environmental liability cases for events that occurred before 2008, the claimant had to prove the harm and the causation relationship, but the defendant had the burden of proving due diligence.

In addition, the tribunal disagreed with Burlington regarding the statute of limitations rule, deciding that the statute of limitations was a procedural matter and, therefore, the rule of the 2008 Constitution should be applied even to prior events.

The Perenco tribunal also decided that for events that occurred after 2008, the applicable regime was a strict liability regime. In contrast to Burlington, the Perenco tribunal did not go as far as to say that strict liability means that there is a presumption of causation. The Perenco tribunal’s interpretation of strict liability under the 2008 Constitution was that the plaintiff had the burden of proving both harm and causation, and that the defendant could not allege due diligence as a valid defense.

In sum, under Burlington, a defendant in an environmental damage claim is in a more difficult situation: it is useless for him to demonstrate that he acted with due diligence, he has the burden proving the absence of causation, and, for events that occurred after 2008, he also has the burden of proving that there was no harm. In contrast, under Perenco, for events that occurred before 2008, the defendant can prove that he acted with due diligence, does not have to prove the absence of causation, and it is the plaintiff who must prove that the defendant’s actions caused the harm.  For events that occurred after 2008, the defendant may not allege due diligence as a defense, but it is still the plaintiff who has the burden proving both harm and causation.

The importance of this distinction is crucial, because proof in environmental liability cases is often complex. This is particularly true in Ecuador and in the field of oil exploitation, where controversies regarding environmental damage frequently refer to damages caused in areas that have been operated by several companies at different times.

Conclusions

Burlington and Perenco are two investment arbitration cases in which international courts have thoroughly examined issues of Ecuadorian law that, despite being crucial for determining liability in environmental law, have not been fully explored by Ecuadorian courts.

As these decisions show, there appear to be at least two different interpretations regarding the admissibility of defenses in these types of cases. Under Burlington, the defendant cannot avoid liability even if he shows that he acted with due diligence, and it also has the burden of proving the absence of harm and of causation. Under Perenco, the defendant cannot avoid liability by showing that he acted with due diligence (for events that occurred after 2008), but it is the plaintiff who must prove the harm and the causal relationship.

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