15 September 2016

Case Report: Murphy Exploration & Production Company-International v The Republic of Ecuador, May 16

This article was written by Dorothy Murray (partner) and Edmund Northcott (trainee solicitor).

A PCA Tribunal ruled in a partial award of 6 May 2016 on Murphy Oil Corp’s treaty claims under the Ecuador-United States of America BIT (the “BIT”). Murphy claimed for breaches of fair and equitable treatment (“FET”), the umbrella clause, full protection and security, non-impairment and expropriation. However, as the Tribunal found a breach of the FET standard it did not deem it necessary to consider Murphy’s other BIT claims. In essence, Murphy alleged that as a result of Law 42 (which imposed an increased levy on oil profits) it had been forced to sell off its stake in a drilling consortium to the Ecuadorian government at an unfairly low price.

Law 42 was implemented to capture profits flowing from rapidly increasing oil prices in the 2000s. The rate was initially set at 50% in 2006, and later raised to 99% in 2009.

The Tribunal ruled the Law 42 was not a tax, so did not fall within the tax modification clauses of the relevant production sharing contracts ("PSCs”) (and allowed the Tribunal to retain jurisdiction under the BIT).

The Tribunal rejected Murphy’s argument that the 50% rate was illegal, as it did not fundamentally alter the PSCs to breach the FET standard under the BIT; “[Murphy] was still able to earn more revenue with Law 42 at 50% than it did before the oil price rise, notwithstanding that it was not receiving the full potential revenue from those sales.”[1] The Tribunal recognised Ecuador’s right to take advantage of fluctuations in the oil market, resulting in 93% of Murphy’s damages claim being rejected. The Tribunal commented “that States retain flexibility to respond to changing circumstances unless they have stabilised their relationship with an investor. Ecuador was within its sovereign right to react to the significant change in oil prices, as many States did.[2] Furthermore, the Tribunal could not accept that the “Claimant could have reasonably expected that there would be no governmental response to the significant rise in oil prices.”[3]

The breach of the BIT the Tribunal did identify was in respect of the 99% levy – this was considered to be a violation of a legitimate expectation that the terms of the PSCs would not change except within the confines of the law, and pursuant to a negotiated, mutual agreement between the parties. The Tribunal were reluctant to determine (despite being asked) exactly where the cut-off of permissible taxation/governmental levies lay between 50% and 99%, as each case will ultimately turn on its facts. Nevertheless, this ruling provides states with some comfort as Tribunals may apply a margin of appreciation in respect of measures designed to benefit from unforeseen economic variations, even where such measures are at the expense of foreign investors with international-treaty protection.

[1] Murphy Exploration & Production Company-International and The Republic of Ecuador, Partial Final Award dated 6 May 2016, paragraph 278.
[2] Id., paragraph 276.
[3] Id., paragraph 280.

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