Foley Hoag Wins Fourth Favorable Outcome for Ecuador on Murphy Oil Claims

February 17, 2017

On February 10, 2017, the arbitral tribunal in Murphy Exploration & Production Company – Int’l v. Ecuador (PCA Case No. 2012-16) delivered its final award in this long-running matter under the Ecuador-U.S. bilateral investment treaty, rejecting Murphy’s efforts to increase the relatively small award in had received last May by upwards of $160 million. A team of Foley Hoag LLP attorneys from the firm’s Washington, D.C. and Paris offices represented Ecuador at the tribunal. 

Last May’s partial award had already denied 95% of the $633 million sought by Murphy, leaving it with $31 million (including a principal damages amount of $20 million, $7.1 million in pre-award interest, and $4 million in costs of arbitration), an amount unchanged in the final award. 

This represents a significant victory for Ecuador in a series of cases arising out of Ecuador’s 2006 Law 42 that imposed a levy on windfall oil profits due to the last decade’s unprecedented crude oil price spikes. In addition to the final and partial awards rendered in this case, Foley Hoag had previously led Ecuador’s successful challenge to the jurisdiction of an ICSID tribunal in Murphy’s first effort to arbitrate its claims in 2010, as well as Ecuador’s challenge to ICSID’s registration of Murphy’s second arbitration in 2011.

The Foley Hoag team consisted of partners Mark Clodfelter, Bruno D. Leurent and Thomas Bevilacqua; counsels Alberto Wray and Ivan Urzhumov; and associates Diana Tsutieva (case associate), Constantinos Salonidis and Diego Cadena.

Murphy International claimed that Law 42 and related decrees resulted in violations of the provisions of the Ecuador-United States bilateral investment treaty on fair and equitable treatment, the treaty’s so-called “umbrella clause,” expropriation and other provisions, as well as violations of what it alleged to be an investment agreement. It claimed $633 million in alleged losses, including pre-award interest, as a result of these levies.

In its partial final award issued in May 2016, the arbitral tribunal rejected Ecuador’s jurisdictional objection based on Article X of the Ecuador-U.S. bilateral investment treaty, which contains a tax carve-out provision restricting the types of claims relating to “matters of taxation” that may be asserted under the treaty’s dispute resolution mechanism. This finding went against the findings of several prior reputable tribunals including one decision which expressly determined that Law 42 was a tax-like measure for the purposes of Article X of the Ecuador-U.S. bilateral investment treaty.

On the merits, the tribunal rejected Claimant’s argument that it could have reasonably expected that there would be no governmental response to the unforeseen crude oil price spikes. It found that Law 42, which set the levy on windfall profits at 50%, did not breach the treaty.  However, it found that the subsequent Decree No. 662 fixing the State share in the windfall profits at 99%, breached the fair and equitable provision of the treaty.

Nonetheless, the tribunal only awarded $20 million plus interest to Murphy International for restitution of the Law 42 payments at 99%. In the final award, the tribunal found that the Claimant’s second head of damages, which Murphy computed to be $355 million, was zero. The tribunal thus recognized that Murphy International’s claim of $633 million was exaggerated.