Petroleum Corporation v.

Ecuador
Ecuador was ordered to damagesthe largest award to be handed down in an ICSID case
after a tribunal determined that Ecuadors decision to terminate an American oil companys
participation contract was tantamount to expropriation.
Under Occidentals participation contract with Ecuador, the company was granted rights to
explore and exploit oil in Block 15, located in the Amazon region, and keep a share of the oil
that it produced.
The seeds of the dispute were planted in a farmout agreement with Alberta Oil Corporation
(AEC), which gave the Canadian firm a 40% economic interest in Occidentals operations.
Occidental and AEC also envisioned a second stage to the agreement, in which AEC would
be granted legal title to the operations in Block 15.
Some four years later, on the heels of a US$75 million award in favour of Occidental in
connection with another dispute with Ecuador, the farmout agreement came under scrutiny by
authorities in Ecuador. The deal with AEC would ultimately lay the basis for the Minister of
Energy to terminate Occidentals contract in May 2006.

A key point of contention was whether Occidental required the government of Ecuadors
approval to enter into the farmout agreement with AEC. Under the terms of Occidentals
participation contract with Ecuador, government approval was required to transfer rights
under the participation contract to third parties.
Occidental argued that the farmout agreement only provided AEC with an economic interest
in the project; it would not be until the second stage of the agreement, when AEC would be
granted legal title, that rights would be transferred.
In siding with Ecuador, however, the tribunal determined that AEC was granted more than an
economic interest, it also gained managerial and voting rights under is agreement with
Occidental. As such it, the tribunal concluded that Occidental had made a serious mistake
in not gaining government approval.

The tribunal would add that Occidental had not acted in bad faith in not seeking permission.
While the tribunal agreed with Ecuador that the Occidental Petroleum Corporation breached
the participation contract, it nonetheless ruled that Ecuadors response to that violation was
disproportionate.

The rule proportionality was used in the memorial