Arbitration Proceedings

Overview

In 2004, Chevron Corporation and its subsidiary Texaco Petroleum Company (Texpet) filed an arbitration claim against Petroecuador, Ecuador's state-owned oil company. The action seeks to enforce the provision of the Joint Operating Agreement (JOA) that requires Petroecuador to indemnify Chevron for any and all claims arising from Texpet's role as operator in the former Petroecuador-Texpet consortium. Under the terms of the JOA signed by the two parties and in accordance with rules established by the American Arbitration Association (AAA), any consortium-related dispute between the two parties is to be settled by arbitration in New York.

Chevron filed the claim because to date Petroecuador has steadfastly failed to carry out its responsibilities under the JOA, a legally binding contract which states, "The Parties shall indemnify and save the Operator harmless from all claims and demands which may be made against Operator by third parties due to, arising out of, or related to the performance of the Operator of its duties under this agreement." (Texpet was the operator of the consortium until 1990, and Petroecuador was majority owner.)

Petroecuador has not only refused to acknowledge the contract's legally binding claim, but together with the Republic of Ecuador, filed suit against Chevron in New York state court seeking to prevent the arbitration from proceeding. Chevron successfully petitioned that the action be transferred to the Federal Court for consideration, and the claim now resides with the U.S. District Court for the Southern District of New York.

About the Joint Operating Agreement

The 1965 Joint Operating Agreement, like operating agreements entered into by parties participating in oil and gas concessions in many parts of the world, was a contract among the parties to the Napo Concession, governing all operational and financial issues associated with the oil exploration and production activities of the partners in the concession area of Ecuador. The JOA, which expressly binds all successors and assigns to the Napo Concession, requires that the parties indemnify the operator for actions taken on the parties’ behalf.

According to the JOA, "the provisions of this Agreement shall extend to and be binding upon the respective successors and assigns of the Parties hereto . . . ." When Petroecuador assumed a 25-percent interest in the consortium in 1974, and subsequently assumed all of Gulf Oil's remaining interest in 1976 (giving it a 62.5 percent majority interest in the consortium), it assumed all of the rights and obligations of the JOA, even though it was not an original party to the agreement. Moreover, throughout the entire time Petroecuador participated in the Napo Concession with Texpet, Petroecuador performed according to the requirements of the Joint Operating Agreement and accepted its benefits. Petroecuador therefore remains bound by the provisions of the Joint Operating Agreement.

Litigation Status

  • Although the Republic of Ecuador and Petroecuador have sought to permanently block Chevron's claim seeking enforcement of the JOA and indemnification from costs and any future judgment against the company related to the ongoing environmental lawsuit, Judge Leonard B. Sand of the Federal District Court of New York rejected these claims on June 27, 2005.
  • Instead, the Court provided a temporary injunction until it can hear sufficient arguments. To that end, the judge instructed Petroecuador under discovery to provide Chevron any evidence it has to support its claims that Petroecuador is not bound by the JOA.
  • In his June 2005 ruling, Judge Sand also dismissed the argument by the Republic of Ecuador and Petroecuador that sovereign immunity protects them from Chevron's claim that the Republic and Petroecuador breached the 1998 remediation settlement agreement.

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