A-List Celebrity No. 7: The Perenco v. Ecuador case

This article is part of the series A-List: The Celebrities of Arbitration Cases. A series delving into the most renowned cases that have shaped the landscape of international arbitration.

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Parties: Perenco Ecuador Ltd. v. Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (Petroecuador)

Decided by: Arbitral Tribunal in the ICSID Case No. ARB/08/6 (H.E. Judge Peter Tomka, Mr Neil Kaplan, C.B.E., QC, SBS, Mr J. Christopher Thomas, QC)

Date: 27 September 2019 (Award)

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Why is this case famous?

The Perenco v. Ecuador case is famous because it flipped the script on investor-state arbitration. Usually, investment cases are like VIP lounges for investors — they can get protection, compensation, and (if they are lucky) a sympathetic tribunal. But Ecuador pulled off a plot twist. Not only did it defend itself against Perenco’s claim, but it also hit back with a counterclaim, arguing that Perenco's operations had trashed the Amazon. And here’s the kicker — the tribunal agreed. For the first time in a major arbitration, an investor was ordered to pay a state ($54 million, no less) for environmental damage. This case became a legal landmark, proving that investors aren’t untouchable and states can demand accountability for environmental harm. The case showed investors that if you make a mess, you might have to clean it up.

The context of the case

This is one of those (very) long investment arbitration cases. To give you an idea, the request for arbitration was served on 30 April 2008, and the Award date was 27 September 2019. As you can imagine, a lot has happened in the meantime.

It all starts as an ordinary investment arbitration case.

In 2002, Perenco signed two Participation Contracts with Ecuador to explore and exploit hydrocarbons in the Amazon. In 2006, Ecuador enacted a law establishing that if oil prices rose above a certain threshold, the state would be entitled to a share of the "surplus" revenues. Between 2006 and 2008, Perenco made the payments without prejudice and under protest. When the President of Ecuador announced in 2008 that negotiations had stopped, Perenco started the arbitration.

In making its case, Perenco argued that Ecuador breached its obligations under the 1994 France-Ecuardo BIT by adopting a series of measures. The request for arbitration was brought to ICSID based on Article 9 of that BIT, as well as under the arbitration clauses in the Participation Contracts.

The arbitration was complex and involved many steps. There was a request for interim measures, a challenge against one of the arbitrators, and a bifurcation dividing the case into jurisdiction and liability. After the tribunal acknowledged to have jurisdiction over the dispute, Ecuador announced that:

“it may submit various counterclaims with its counter-memorial [on liability]”

And that is precisely what happened.

The counterclaims

Ecuador’s counterclaims were essentially based on what its experts called an “environmental catastrophe” in the two oil blocks situated in the country's Amazonian rainforest that had been worked by the consortium under Perenco's operatorship.

Their claims included requests that Perenco be found liable and pay no less than:

• US$ 2,279,544,559 for soil clean-up costs

• US$ 265,601,700 for groundwater remediation costs

• US$ 3,380,000 for further groundwater studies (subject to payment of compound interest from the date of the Award until the date of full payment).

As you can imagine, Perenco put up a fight against the counterclaims.

First, in the tribunal's words, they emphatically rejected Ecuador’s depiction of the condition as an “environmental catastrophe.” Instead, it defended that it had been a responsible manager and that the whole counterclaim was an attempt to create a counterweight and divert attention from Perenco’s claim. Perenco also contested the claim as a matter of law, as insufficiently proven, prejudiced by temporal limits, and based on fundamentally flawed evidence.

The rarety of counterclaims in investment arbitration

Why is this case a rarety, you ask? Well, in theory, states can bring counterclaims in investor-state arbitration. Rule 40 of the 2006 ICSID Arbitration Rules (very similar to Rule 48 of the 2022 version of the same rules) provided that:

(1) Except as the parties otherwise agree, a party may present an incidental or additional claim or counter-claim arising directly out of the subject matter of the dispute, provided that such ancillary claim is within the scope of the consent of the parties and is otherwise within the jurisdiction of the Centre.

Counterclaims, however, are almost a myth in practice. To be admitted in the arbitration, they must be connected to the original claim, usually by demonstrating a breach of the agreement or treaty governing the investor’s claim. Most bilateral investment treaties (BITs) protect investors' rights but don't typically impose reciprocal obligations, making it difficult for states to bring counterclaims.

The Perenco case was the exception…

Here, Ecuador succeeded in connecting its environmental counterclaim to Perenco's obligations under the specific contracts and its alleged environmental violations.

The Verdict? A Landmark Decision with a Lasting Legacy

Ecuador's counterclaims were not only admitted in this case but actually granted, which is why the Perenco v. Ecuador case didn’t just make waves — it made history.

By recognizing Ecuador’s environmental counterclaim, the tribunal opened the door (just a crack) for states to hold investors accountable in arbitration proceedings. It was a wake-up call for investors who had grown used to being the ones making demands. Here, they were the ones on the hook.

Ecuador may not have walked away with the billions it initially asked for, but the $54 million award still sent a clear message: arbitration isn't just a one-way street. Investors seeking protection under treaties might also have to face the consequences of their actions.

Discussions about counterclaims have intensified since this case. Newer investment treaties are starting to include provisions that impose obligations on investors, making it easier for states to raise counterclaims. While counterclaims are still rare, they no longer seem impossible.

So, the next time you hear whispers about investors facing counterclaims in arbitration, remember: Perenco v. Ecuador did it first. And like all A-list celebrities, its legacy is here to stay.