This content is from: Local Insights

Latin America litigation

Since disposing of its oil interests in Ecuador in 1992, Texaco has faced a spate of lawsuits stemming from damages allegedly caused by decades of oil exploration and extraction activities carried out by a consortium company owned by the state-owned oil company, Petroecuador, and Texaco. In the US, these claims have been pressed in the federal courts through class actions brought in the name of Ecuadorean citizens seeking damages of US$1.5 billion and equitable relief consisting of a court-supervised clean-up of the affected areas in Ecuador. The first such suit, Sequiha v Texaco, started in Texas in August 1993, seeking damages for 500,000 Ecuadoreans, and was dismissed five months later on grounds of comity and forum non conveniens. The second, Aguinda v Texaco, was brought in November 1993 for a class of about 30,000 indigenous citizens. It continued through pre-trial discovery until November 1996, when the New York federal court dismissed the claims on the same grounds. However, the judge also based the dismissal on the failure to join two indispensable parties to the litigation — Petroecuador and the government of Ecuador — deemed necessary for the equitable portion of the case.

In an about-face on the part of the Ecuadorean government, which vigorously opposed the US lawsuits in prior proceedings, the new administration of president Fabian Alarcon has formally notified the New York federal court of its desire to intervene in the Aguinda suit, formally submitting itself to the court's jurisdiction, waiving sovereign immunity and joining the application for reconsideration of the November 1996 dismissal.

While the US lawsuits have been repeatedly cited by advocacy groups targeting Texaco, relatively little attention has been paid to Texaco's recent settlement of a lawsuit brought by the municipality of Lago Agrio, a small town in the Amazon oil-producing region of north-eastern Ecuador. The Lago Agrio suit, started in July 1994, sought compensation of Su800 billion (US$2 billion) for environmental damage allegedly caused. The settlement, formally approved by the court in September 1996, resulted in an agreement by Texaco, without admitting any liability, to pay Su3 billion for water and sewerage projects designated by the municipality, and released the company from any other monetary claims.

Although the amount of the settlement was far less than requested by the municipality, a review of the parties' legal contentions highlights the complexities of the claims against Texaco. The municipality's complaint contained different categories of legal claims, ranging from a broad principle of strict liability for all harm caused by its oil activities to the local lands, crops, lakes and rivers, as well as human and animal life, in violation of international and constitutional legal standards, to more specific violations of Ecuador's laws and regulations, including deliberate violations designed solely to save money. The claims also cited specific provisions of the consortium's exploration and production agreements with the government requiring adherence to international oil industry norms, and recited details of operational practices which caused particular damage in the Ecuadorean rainforest. The municipality claimed cancer rates, birth defects and other illnesses dramatically increased among the population of Lago Agrio because of exposure to chemicals discharged by Texaco. Among the grounds for its claims were the civil responsibility provisions of the Ecuadorean Civil Code (Articles 2241 to 2243) which establish the duty of a person who violates a law or commits a crime to indemnify the injured party, independent of any criminal charges that may be presented.

In its responses, Texaco denied any departure from Ecuadorean requirements or industry standards, disputed the claims of improper operational practices and adverse health effects, and cited an independent environmental audit as evidence that the damage caused by its activities was consistent with industry standards. It also raised procedural defences of two kinds. First, it disputed the legal standing of the municipality to seek compensation and asserted a statute of limitations defence. Second, it insisted the Ecuadorean state and Petroecuador be joined as parties to the lawsuit because of their responsibility for the oil exploration activities undertaken by Texaco. The Ecuadorean state, Texaco alleged, had established the basic policy of promoting oil exploration and development and its regulatory bodies had approved Texaco's annual programmes. Petroecuador's liability was premised on its express assumption of liabilities when it acquired its successive share interests in the consortium, aggregating 62.5% by 1976, and on the indemnification provisions of the operating agreement between Texaco and the consortium. Texaco also argued that Petroecuador's majority share interest, coupled with the fiscal regime adopted over time, had effectively returned more than 90% of the profits of the consortium to the government.

The judge in the provincial court permitted the municipality to continue its suit and denied Texaco's request to join the Ecuadorean state and Petroecuador, prompting an appeal by Texaco to the intermediate appellate court. Although empowered to participate in a lawsuit brought by a municipality, the attorney-general of Ecuador chose not to appear. Meanwhile, in the evidentiary phase of the case, the parties submitted competing expert affidavits as to the extent of damage by Texaco, with the municipality receiving support from foreign non-governmental organizations opposed to the findings of the environmental audit commissioned by Texaco.

While its appeal was pending, in May 1995 Texaco agreed with the Ecuadorean government to undertake a clean-up programme for oil activities in the region and also to negotiate settlements with several municipalities, including Lago Agrio, which had raised their own claims against the company. Texaco reached an agreement with the municipality in May 1996, which was submitted to the court for its approval and entered as a judgment in September 1996. Viewed in light of the original demand, the settlement appears relatively favourable to Texaco, imposing a financial contribution of less than US$1 million to water treatment projects selected by the municipality.

The vagaries of Ecuadorean politics, however, may lead to the future resurrection of these legal claims. The decision of the Ecuadorean government to reverse its policy and to join the plaintiffs in the Aquinda lawsuit against Texaco remains subject to the federal district judge's approval, but leaves open the possibility that the considerations which militated in favour of the prior dismissals will now be set aside and the litigation will go ahead in the US. With this unusual step, Ecuador's current administration has placed itself squarely on the side of the indigenous peoples fighting Texaco, its former partner.

Mark H O'Donoghue and Eduardo Brito
Curtis, Mallet-Prevost, Colt & Mosle
New York

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