{"id":7880,"date":"2022-09-28T10:44:01","date_gmt":"2022-09-28T09:44:01","guid":{"rendered":"https:\/\/www.vocalegalglobal.com\/occidental-v-ecuador\/"},"modified":"2023-10-11T13:30:24","modified_gmt":"2023-10-11T12:30:24","slug":"occidental-v-ecuador","status":"publish","type":"post","link":"https:\/\/www.vocalegalglobal.com\/en-us\/occidental-v-ecuador\/","title":{"rendered":"Case study: \u201cserious problems of translation\u201d\u2014Occidental v. Ecuador"},"content":{"rendered":"

A good illustration of the ways in which poor legal translation<\/a> may affect the outcome of an international dispute is the ICSID arbitration of <\/span>Occidental Petroleum v Ecuador<\/span>.<\/span>\u00a0<\/span><\/p>\n

The dispute concerned the expropriation of a petroleum investment, and the USD1,77 billion damages award issued by the tribunal on October 5, 2012 was, at that time, the largest ever made by an investment tribunal. However, as subsequent events showed, a whopping USD760 million, or 40% of the damages, had been awarded based on a misunderstanding by the tribunal majority of Ecuadorian law as presented to the tribunal in English translation.<\/span><\/p>\n

Facts of the dispute<\/b><\/p>\n

The claimant, Occidental Petroleum, was the largest U.S. investor in Ecuador and had a participation contract with the State. The contract prohibited the investor from assigning its rights thereunder to third parties without the government\u2019s authorization. When Occidental transferred 40% of its interest in the investment to a Canadian company without first obtaining the required approval, Ecuador used that as an excuse to terminate the contract with the company. Occidental then instituted international arbitration under the U.S.-Ecuadorian bilateral investment treaty (BIT) before a tribunal comprised of Yves Fortier, David Williams and Brigitte Stern. None of the arbitrators were native speakers of Spanish or had any particular familiarity with the Ecuadorian legal system.<\/span><\/p>\n

The tribunal\u2019s decision<\/b><\/p>\n

The tribunal was unanimous that Ecuador\u2019s termination of the participation contract had amounted to unlawful expropriation contrary to the bilateral investment treaty between the U.S. and Ecuador and ordered the State to compensate the investor for the loss of the investment. However, in assessing the amount of compensation, the question arose whether the 40% interest transferred to a third party formed part of the expropriated assets that had to be compensated. The answer depended on whether the transfer without the required government approval was valid under Ecuadorian law.\u00a0<\/span><\/p>\n

The majority of Yves Fortier and David Williams decided that the transfer was \u201cinexistent\u201d under Ecuadorian law for failure to comply with the required formalities.<\/span> The transfer thus had no legal effect, and the transferred 40% interest continued to form part of the taken investment, and had to be compensated. Such compensation represented nearly USD760 million\u2014an enormous amount by any standard.<\/span><\/p>\n

The error of Ecuadorian law<\/b><\/p>\n

The tribunal\u2019s award was accompanied by a scathing dissent of Professor Brigitte Stern concerning its conclusions on damages. Professor Stern pointed out that, contrary to the majority\u2019s view, failure to comply with a required formality did not render the transfer of the 40% interest by Occidental \u201cinexistent.\u201d The lack of required government authorization did lead to the \u201cabsolute nullity\u201d of the transfer, but, unlike \u201cinexistence,\u201d such nullity did not take effect until pronounced by a competent court.<\/span> Given that no court ever pronounced such nullity, Occidental\u2019s 40% interest was validly transferred prior to the expropriation, and therefore did not form part of the taken assets that required compensation.<\/span><\/p>\n

Misleading translations<\/b><\/p>\n

As a possible source of the tribunal majority\u2019s confusion as to the meaning and effects of \u201cinexistence\u201d and \u201cabsolute nullity,\u201d Professor Stern\u2019s dissenting opinion pointed to \u201cserious problems of translation\u201d<\/span> of two Ecuadorian Supreme Court judgments on which the majority \u201cmight have implicitly relied.\u201d<\/span> In those judgments, the Supreme Court held that a legal act will be deemed \u201cinexistent\u201d if it fails to respect the <\/span>solemnidades<\/span><\/i> prescribed by law. The translator rendered the term \u201c<\/span>solemnidades\u201d <\/span><\/i>in English as \u201clegal requirements.\u201d<\/span> However, as Professor Stern\u2019s dissenting opinion pointed out, this translation was \u201cmisleading\u201d:<\/span> the term \u201c<\/span>solemnidades\u201d <\/span><\/i>referred only to the requirements of solemn form prescribed by law, such as the requirement of a public deed for real estate transactions. \u201c<\/span>Solemnidad<\/span><\/i>\u201d in no way referred to \u201clegal requirements\u201d generally, such as the requirement of a government authorization. As Professor Stern pointed out, the majority\u2019s conclusion \u201cassimilat[ing] solemnities [i.e.<\/span> solemnidades<\/span><\/i>] with legal requirements\u201d could \u201cin no way be based on the original Spanish texts,\u201d<\/span> and found that:<\/span><\/p>\n

\u201chad the translations concerning the criteria of inexistence been correct and the original Spanish texts been really taken into account, the conclusions arrived at by the majority would have been impossible to sustain.\u201d<\/span><\/p>\n

Annulment<\/b><\/p>\n

Ecuador requested ICSID to annul the USD1,77 billion damages award. The annulment committee appointed by ICSID to hear the request comprised Professor Fern\u00e1ndez-Armesto, Judge Florentino P. Feliciano, and Mr. Rodrigo Oreamuno, all native Spanish speakers. Their conclusion on the correct meaning of the term \u201csolemnidad\u201d was unequivocal:<\/span><\/p>\n

The Committee has analysed the case law referred to by the Tribunal and has found no support for the majority\u2019s conclusion: all cases deal with the inexistence of promises to buy\/sell which had not been properly formalized in an \u201cinstrumento p\u00fablico\u201d (i.e. in a notarial deed). The case law is clear that \u201cinexistence\u201d only arises in exceptional cases, when the law requires that the contractual consent be formalized with \u201csolemnidad\u201d (i.e. in an \u201cinstrumento p\u00fablico\u201d, as required in certain contracts involving real estate). There is no discussion that the consent to enter into the Farmout Agreements was properly formalized and did not require \u201csolemnidad.\u201d \u2026 The parties have not referred to any Ecuadorian case law holding that an otherwise valid contract was rendered inexistent as a consequence of the failure to obtain an administrative authorization.<\/span><\/p>\n

The committee annulled 40% of the damages award, reducing the amount of damages by some USD700 million.\u00a0<\/span><\/p>\n

The lessons of <\/b>Occidental v. Ecuador<\/b><\/p>\n

As Professor Stern\u2019s dissent pointed out, the only evidence on the record that could support the <\/span>Occidental<\/span><\/i> majority\u2019s conclusions that an act could be deemed \u201cinexistent\u201d for failure to comply with \u201ca legal requirement different from a public deed\u201d were misleading English translations, on which the \u201cthe majority might have implicitly relied.\u201d<\/span> While the annulment committee (which proceeded based on the original Spanish) did not expressly refer to the translation issues, it squarely agreed with Professor Stern on the correct meaning of Ecuadorian legal terms.\u00a0<\/span><\/p>\n

It is therefore reasonable to assume (as Professor Stern\u2019s dissent did) that, if that correct meaning had been taken into account by the tribunal\u2019s majority,<\/span> it would have arrived at the correct outcome and spared the parties the need for further lengthy annulment proceedings, additionally costing over USD10 million.<\/span>\u00a0<\/span><\/p>\n

The <\/span>Occidental<\/span><\/i> saga thus illustrates the paramount importance of clarity and accuracy of the translations presented in evidence to international tribunals and the potential for very real damage that can flow from an unfortunate selection of translation service provider.<\/span><\/p>\n

References<\/p>\n

    \n
  1. \u00a0ICSID Case No ARB\/06\/11.<\/span><\/li>\n
  2. Occidental v. Ecuador<\/em> Award, October 5, 2012, paras 626-644.<\/span><\/li>\n
  3. Occidental v. Ecuador,<\/em> Decision on Annulment of the Award, November 2, 2015, para. 241.<\/span><\/li>\n
  4. Occidental v. Ecuador<\/em>, Dissenting Opinion of Professor Brigitte Stern, September 20, 2012, para. 94.<\/span><\/li>\n
  5. \u00a0id.<\/i> at para 78.<\/span><\/li>\n
  6. Occidental v. Ecuador,<\/em> Decision on Annulment of the Award, November 2, 2015, paras 575-576<\/span><\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"

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