Case study: “serious problems of translation”—Occidental v. Ecuador

A good illustration of the ways in which poor legal translation may affect the outcome of an international dispute is the ICSID arbitration of Occidental Petroleum v Ecuador. 

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.

Facts of the dispute

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’s 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.

The tribunal’s decision

The tribunal was unanimous that Ecuador’s 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. 

The majority of Yves Fortier and David Williams decided that the transfer was “inexistent” under Ecuadorian law for failure to comply with the required formalities. 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—an enormous amount by any standard.

The error of Ecuadorian law

The tribunal’s 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’s view, failure to comply with a required formality did not render the transfer of the 40% interest by Occidental “inexistent.” The lack of required government authorization did lead to the “absolute nullity” of the transfer, but, unlike “inexistence,” such nullity did not take effect until pronounced by a competent court. Given that no court ever pronounced such nullity, Occidental’s 40% interest was validly transferred prior to the expropriation, and therefore did not form part of the taken assets that required compensation.

Misleading translations

As a possible source of the tribunal majority’s confusion as to the meaning and effects of “inexistence” and “absolute nullity,” Professor Stern’s dissenting opinion pointed to “serious problems of translation” of two Ecuadorian Supreme Court judgments on which the majority “might have implicitly relied.” In those judgments, the Supreme Court held that a legal act will be deemed “inexistent” if it fails to respect the solemnidades prescribed by law. The translator rendered the term “solemnidades” in English as “legal requirements.” However, as Professor Stern’s dissenting opinion pointed out, this translation was “misleading”: the term “solemnidades” referred only to the requirements of solemn form prescribed by law, such as the requirement of a public deed for real estate transactions. “Solemnidad” in no way referred to “legal requirements” generally, such as the requirement of a government authorization. As Professor Stern pointed out, the majority’s conclusion “assimilat[ing] solemnities [i.e. solemnidades] with legal requirements” could “in no way be based on the original Spanish texts,” and found that:

“had 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.”

Annulment

Ecuador requested ICSID to annul the USD1,77 billion damages award. The annulment committee appointed by ICSID to hear the request comprised Professor Fernández-Armesto, Judge Florentino P. Feliciano, and Mr. Rodrigo Oreamuno, all native Spanish speakers. Their conclusion on the correct meaning of the term “solemnidad” was unequivocal:

The Committee has analysed the case law referred to by the Tribunal and has found no support for the majority’s conclusion: all cases deal with the inexistence of promises to buy/sell which had not been properly formalized in an “instrumento público” (i.e. in a notarial deed). The case law is clear that “inexistence” only arises in exceptional cases, when the law requires that the contractual consent be formalized with “solemnidad” (i.e. in an “instrumento público”, 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 “solemnidad.” … 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.

The committee annulled 40% of the damages award, reducing the amount of damages by some USD700 million. 

The lessons of Occidental v. Ecuador

As Professor Stern’s dissent pointed out, the only evidence on the record that could support the Occidental majority’s conclusions that an act could be deemed “inexistent” for failure to comply with “a legal requirement different from a public deed” were misleading English translations, on which the “the majority might have implicitly relied.” 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. 

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

The Occidental 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.

References

1.  ICSID Case No ARB/06/11.
2. Occidental v. Ecuador Award, October 5, 2012, paras 626-644.
3. Occidental v. Ecuador, Decision on Annulment of the Award, November 2, 2015, para. 241.
4. Occidental v. Ecuador, Dissenting Opinion of Professor Brigitte Stern, September 20, 2012, para. 94.
5.  id. at para 78.
6. Occidental v. Ecuador, Decision on Annulment of the Award, November 2, 2015, paras 575-576