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Award

GLOSSARY
Abbreviation Definition
"AEC" Alberta Energy Corporation
"BIT" or "Treaty" Treaty Between the United States of America and the Republic of Ecuador Concerning the Encouragement and Reciprocal Protection of Investment
"DCF" Discounted Cash Flow
"DNH" National Hydrocarbons Directorate
"FMV" Fair Market Value
"HCL" Hydrocarbons Law
"OCP" Oleoducto de Crudos Pesados
"OEPC" Occidental Exploration and Production Company
"OPC" Occidental Petroleum Corporation
"PetroEcuador" The Republic of Ecuador's national oil company and successor to Corporación Estatal Petrolera Ecuatoriana ("CEPE"). Today, Empresa Pública de Hidrocarburos del Ecuador.
"RAFs" Reserve Adjustment Factors
"SOTE" Sistema de Oleoducto Trans-ecuatoriano
"VAT" Value Added Taxes

THE TRIBUNAL

Composed as above,

After deliberation,

Makes the following Award:

I. PROCEDURE

A. Registration of the Request for Arbitration

1.

On 17 May 2006, Occidental Petroleum Corporation ("OPC") and Occidental Exploration and Production Company ("OEPC"), two U.S. companies, (together the "Claimants") incorporated in the States of Delaware and California, respectively, filed with the International Centre for Settlement of Investment Disputes ("ICSID" or the "Centre") a Request for Arbitration under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States ("ICSID Convention") against the Republic of Ecuador ("Ecuador" or the "Respondent") and Empresa Estatal Petróleos del Ecuador ("PetroEcuador").1

2.
The parties' dispute concerns the termination [ caducidad ] of a 1999 Participation Contract between OEPC and PetroEcuador for the exploration and exploitation of hydrocarbons in Block 15 of the Ecuadorian Amazon region (the "Participation Contract").
3.
The Request for Arbitration invoked Ecuador's consent to ICSID arbitration contained in the 1993 Treaty Between the United States of America and the Republic of Ecuador Concerning the Encouragement and Protection of Investments (the "BIT"), and PetroEcuador's consent to ICSID arbitration in the Participation Contract.
4.
On 22 May 2006, ICSID acknowledged receipt of the Request for Arbitration and, in accordance with Article 36(1) of the ICSID Convention, transmitted copies of the Request for Arbitration and accompanying documentation to the Republic of Ecuador and PetroEcuador.
5.
By letters of 7, 16 and 29 June 2006, ICSID requested additional information from the Claimants. By letters of 13, 23 and 29 June 2006, the Claimants provided information supplementing their Request for Arbitration. Further information was provided by the Claimants by letter of 6 July 2006.
6.
On 13 July 2006, the Acting Secretary-General of ICSID, in accordance with Article 36(3) of the ICSID Convention, registered the Request for Arbitration, and notified the parties of the registration under ICSID Case Number ARB/06/11.
7.
The Request for Arbitration included (in paragraphs 76 and 77) a Request for Provisional Measures. In accordance with a schedule fixed by ICSID pursuant to Rule 39(5) of ICSID's Rules of Procedure for Arbitration Proceedings (the "ICSID Arbitration Rules"), and later amended with the agreement of the parties, the Claimants filed a particularized Application for Provisional Measures on 18 October 2006. Ecuador then filed a response to the Claimants' Application on 1 December 2006, followed by the Claimants' Reply of 15 December 2006 and Ecuador's Rejoinder of 30 December 2006.

B. Constitution of the Tribunal and Commencement of the Proceeding

8.
By letter dated 29 September 2006, the Claimants informed the Centre that they had selected the method envisaged in Article 37(2)(b) of the ICSID Convention for the constitution of the Tribunal (i.e. the Tribunal would consist of three arbitrators, one arbitrator appointed by each party and the third, who would be the president of the Tribunal, to be appointed by agreement of the parties). By same letter, the Claimants informed the Centre of their appointment of Mr. David A.R. Williams, QC, of New Zealand, as an arbitrator. Mr. Williams accepted his appointment on 18 October 2006.
9.
On 13 October 2006, the Claimants requested ICSID to appoint the arbitrators not yet appointed and to designate an arbitrator to be the president for of the Tribunal in this case, pursuant to Article 38 of the ICSID Convention and ICSID Arbitration Rule 4(1).
10.
By letters of 25 October, 21 November, 1, 12, 13 and 27 December 2006 and 5 January 2007, the Centre consulted with the parties in connection with the appointment of the arbitrators not yet appointed, as envisaged in Article 38 of the ICSID Convention and ICSID Arbitration Rule 4.
11.
By letter of 25 January 2007, the Centre informed the parties that, pursuant to Article 38 of the ICSID Convention and ICSID Arbitration Rule 4, the Acting Chairman of ICSID's Administrative Council had appointed Professor Brigitte Stern, a national of France, as a co-arbitrator and Mr. L. Yves Fortier, QC, of Canada, as the third arbitrator and President of the Tribunal. Professor Stern accepted her appointment on 31 January 2007. Mr. Fortier accepted his appointment on 5 February 2007. At the time of their respective appointments, Professor Stern was a member of the ICSID Panel of Arbitrators appointed by France and Mr. Fortier was a member of the ICSID Panel of Arbitrators appointed by the Chairman of the ICSID Administrative Council.
12.
By letter of 6 February 2007, the Secretary-General of ICSID notified the parties that, all three arbitrators having accepted their appointments, the Tribunal was deemed to be constituted and the proceeding deemed to have begun on that date. By the same letter, the Secretary-General provided copies of the declarations of independence and impartiality signed by each member of the Tribunal in accordance with ICSID Arbitration Rule 6 and informed the parties that Ms. Gabriela Alvarez-Avila, Senior Counsel, ICSID, would serve as Secretary of the Tribunal.

C. Written and Oral Phases of the Proceeding

13.
The Tribunal and the parties held a preliminary telephone conference on 16 February 2007, during which it was agreed that the First Session of the Tribunal would be held on 2 May 2007 at the seat of the Centre in Washington, D.C. It was also agreed that a hearing on the Claimants' Application for Provisional Measures would be held on 3 May 2007. The telephone conference was recorded and copies of the audio recordings were provided to the parties and the members of the Tribunal.
14.
By letter of 19 February 2007, the parties were invited to simultaneously submit any further documents and/or testimony related to the Claimants' Application for Provisional Measures that they may wish to rely upon by 20 April 2007. Both parties submitted additional documentation on 18 April 2007.
15.
With the agreement of the parties and the members of the Tribunal, the President of the Tribunal held an organizational pre-hearing telephone conference with the parties on 26 April 2007. The conference was attended by Messrs. David W. Rivkin, Mark W. Friedman and Gaëtan Verhoosel from Debevoise & Plimpton LLP and by Ms. Laura C. Abrahamson, Assistant General Counsel of OPC, on behalf of the Claimants; Mr. Paul Reichler and Ms. Janis Brennan, from Foley Hoag LLP, Mr. Alberto Wray, at the time with the law firm of Cabezas & Wray Abogados in Quito, and Ms. Claudia Salgado from Ecuador's Procuraduría General del Estado [Ecuador's Attorney General's Office] , participated on behalf of the Respondent; Ms. Gabriela Álvarez-Ávila and Messrs. Gonzalo Flores and Emilio Rodriguez-Larraín, from the ICSID Secretariat, and Ms. Renée Thériault, then from the law firm of Ogilvy Renault LLP in Ottawa, Mr. Fortier's law firm, also participated in the conference call. During the conference call, a number of agreements were reached in connection with the organization of the forthcoming First Session and the hearing on the Claimants' Application for Provisional Measures. Among these, the parties agreed to the appointment of Ms. Thériault as Assistant to the Tribunal. The telephone conference was recorded and copies of the audio recordings were provided to the parties and the members of the Tribunal.
16.
The First Session of the Tribunal and the hearing on the Claimants' Application for Provisional Measures were held, as scheduled, on 2-3 May 2007 at the seat of the Centre in Washington, D.C. In attendance were the three members of the Tribunal, Mr. L. Yves Fortier, Professor Brigitte Stern and Mr. David A.R. Williams. In the absence of Ms. Álvarez-Ávila, Mr. Gonzalo Flores, Senior Counsel, ICSID, was in attendance for the ICSID Secretariat. Ms. Renée Thériault, Assistant to the Tribunal, was also present. The Claimants were represented by Messrs. David W. Rivkin, Mark W. Friedman, Shane Spelliscy, Claudio D. Salas and Gaëtan Verhoosel, from Debevoise & Plimpton LLP, and by Ms. Laura Abrahamson and Messrs. Gerald Ellis and Terry Lindquist of OPC. The Respondent was represented by Dr. José Xavier Garaicoa Ortíz, Ecuador's Procurador General del Estado [Attorney General], Mr. Alberto Wray of Cabezas & Wray Abogados in Quito, Mr. Paul Reichler, Ms. Janis Brennan and Ms. Clara Brillembourg of Foley Hoag, LLP in Washington, D.C., Ms. Claudia Salgado, of the Office of Ecuador's Attorney General, Ms. María Augusta Carrera from PetroEcuador and Mr. Peter Phaneuf from TrialTek Consulting.
17.
During the First Session, the parties confirmed that the Tribunal had been properly constituted in accordance with the ICSID Convention and the ICSID Arbitration Rules and that they had no objection to the appointment of any of the members of the Tribunal. The parties also confirmed their agreement to the appointment of Ms. Renée Thériault, an associate in Mr. Fortier's law firm of Ogilvy Renault, as Assistant to the Tribunal. Finally, the parties agreed to a number of procedural matters which were reflected in summary minutes prepared by the Secretariat and circulated to the parties and the Tribunal. During this session, the parties agreed that the jurisdiction/liability phase and quantum phase (if required) should be separated, but the Claimants requested that the timetable for the quantum phase be fixed at the same time as the liability phase so as avoid unnecessary delay. [A copy of the Minutes is attached to this Award as Annex1].
18.
Upon conclusion of the First Session, the parties addressed the Tribunal on the Claimants' Application for Provisional Measures. Messrs. Rivkin and Friedman addressed the Tribunal on behalf of the Claimants and Mr. Reichler addressed the Tribunal on behalf of the Respondent. During the hearing, and following consultations between the parties, the Claimants' Application was significantly amended.
19.
In accordance with the schedule fixed during the First Session (slightly amended by the Tribunal, following delays in the parties' production of documents), the Claimants filed a Memorial on Liability, with accompanying documentation, on 23 July 2007. The accompanying documentation included, inter alia, the witness statements of Messrs. Andrew Patterson, Casey Olson, Fernando Albuja, Gerald Ellis, John L. Keplinger, Paul MacInnes, and Steven Bell; and the Expert Report of Dr. Hernán Pérez Loose.
20.
On 17 August 2007, the Tribunal issued its unanimous Decision on Provisional Measures.2 In its Decision, the Tribunal, after careful consideration of the parties' positions, concluded that the Claimants had failed to demonstrate that an order for provisional measures was justified in the circumstances and thus dismissed their Application.
21.
By letter of 24 August 2007, the parties were informed that Mr. Gonzalo Flores, Senior Counsel, ICSID, would replace Ms. Álvarez-Ávila as Secretary of the Tribunal, following her departure from ICSID.
22.
On 17 September 2007, the Claimants filed a Memorial on Damages with accompanying documentation. The accompanying documentation included, inter alia, the Second Witness Statements of Messrs. Fernando Albuja, Gerald Ellis, and Andrew Patterson; the Witness Statement of Dr. Surendra Pal (S.P.) Sing; the Expert Reports of Prof. Joseph P. Kalt and Netherland, Sewell & Associates, Inc., and a Second Expert Report of Dr. Hernán Pérez Loose.
23.
Successive changes in the Republic of Ecuador's representation led the Respondent to request, on 17 September 2007, a modification to the schedule for written pleadings agreed during the First Session. The Claimants opposed the Respondent's request by letter of 24 September 2007. The Respondent replied by letter of 15 October 2007.
24.
On 31 October 2007, with the agreement of his co-arbitrators, the President of the Tribunal held a telephone conference with the parties to address: (a) the Respondent's request for a new procedural calendar and (b) the Respondent's representation in this case. During the call, it was concluded that the procedural timetable established by the Tribunal during the First Session would have to be amended. It was further decided that the parties would confer and try to agree on an amended calendar and that a further telephone conference would be held on 31 January 2008 in order to consider revisions to the procedural calendar. The telephone conference was recorded and copies of the audio recordings were provided to the parties and the members of the Tribunal.
25.
By letter of 20 December 2007, the Republic of Ecuador informed the Tribunal that it had selected the law firm of Squire, Sanders & Dempsey LLP as its new counsel of record. The firm is now known as Squire, Sanders (US) LLP.
26.
On 23 January 2008, the parties wrote separately to the Tribunal to inform it that they had failed to reach agreement on a revised procedural calendar and, in their respective letters, each party proposed a procedural calendar to the Tribunal.
27.
As agreed, a telephone conference call was held between the President of the Tribunal and the parties on 31 January 2008. Ms. Laura Abrahamson from OPC, as well as Mr. David W. Rivkin and Ms. Carmen Martinez López from Debevoise & Plimpton LLP, participated in the teleconference on behalf of the Claimants. The Respondent was represented in the telephone conference by Mr. Carlos Venegas, Ms. Claudia Salgado and Ms. Christel Gaibor, from Ecuador's Procuraduría General del Estado and by Messrs. George von Mehren and Stephen P. Anway, from Squire, Sanders (US) LLP. During the telephone conference both parties were given full and equal opportunity to elaborate on their respective submissions of 23 January 2008. The telephone conference was recorded and copies of the audio recordings were provided to the parties and the members of the Tribunal.
28.
On 11 February 2008, the Tribunal issued Procedural Order No.1 directing a revised procedural calendar, including a timetable for the jurisdictional phase of the arbitration with separate timetables for each of the liability and quantum phases (as required).
29.
Pursuant to Procedural Order No. 1, the Respondent, on 7 March 2008, filed a Memorial on its Objections to Jurisdiction, with accompanying documentation. The accompanying documentation included, inter alia, an Expert Report by Dr. Juan Pablo Aguilar Andrade. The Claimants filed a Counter-Memorial on Jurisdiction, with accompanying documentation, on 4 April 2008. The accompanying documentation included, inter alia, a Third Expert Report by Dr. Hernán Pérez Loose.
30.
By letter of April 14, 2008, the Republic of Ecuador informed the Tribunal that, in addition to Squire, Sanders (US) LLP, the law firm of Dechert LLP would represent the Respondent in this proceeding.
31.
Pursuant to Procedural Order No. 1, the Respondent filed a Reply on Jurisdiction, with accompanying documentation, on 23 April 2008. The accompanying documentation included, inter alia, a Second Expert Report by Dr. Juan Pablo Aguilar Andrade.
32.
By letter dated 28 April 2008, the Republic of Ecuador informed the Tribunal of the appointment of Dr. Diego García Carrión as the new Procurador General del Estado [Attorney General], following the resignation of Dr. Xavier Garaicoa Ortíz. In the same letter, the Republic of Ecuador requested amendments to the procedural calendar established in Procedural Order No. 1. The Claimants opposed this request by letter dated 29 April 2008.
33.
On 6 May 2008, the Tribunal issued Procedural Order No. 2, amending the calendar established in Procedural Order No. 1.
34.
The Claimants filed a Rejoinder on Jurisdiction, with accompanying documentation, on 12 May 2008. The accompanying documentation included, inter alia, a Fourth Expert Report by Dr. Hernán Pérez Loose.
35.
As directed by Procedural Order No. 1, a two-day hearing on jurisdiction was held at the World Bank's offices in Paris, on 22-23 May 2008. The three members of the Tribunal, Mr. L. Yves Fortier, Professor Brigitte Stern and Mr. David A.R. Williams, attended the hearing. Mr. Gonzalo Flores, Secretary of the Tribunal, and Ms. Renée Thériault, Assistant to the Tribunal, were also present at the hearing. During the hearing, the Claimants were represented by Messrs. Rivkin and Verhoosel and Ms. Martinez López of Debevoise & Plimpton LLP and by Ms. Laura Abrahamson and Mr. Gerald Ellis of OPC. The Republic of Ecuador was represented by Dr. Diego García Carrión, Procurador General del Estado; Messrs. Carlos Venegas and Francisco Paredes and Ms. Claudia Salgado, from the Attorney General's office; Messrs. George von Mehren, Stephen P. Anway, Hernando Díaz and Rostislav Pekar of Squire, Sanders (US) LLP; Messrs. Eduardo Silva Romero, Pierre Mayer, George Foster and Edward Kling of Dechert LLP; Dr. Galo Chiriboga, Ecuador's Minister of Energy and Mines; and Dr. María Angélica Martinez, from PetroEcuador.
36.
During the hearing, the parties' respective counsel made extensive opening and closing submissions on the various issues raised by the Respondent's jurisdictional challenge. Dr. Juan Pablo Aguilar Andrade and Dr. Hernán Pérez Loose also appeared as expert witnesses at the hearing and were examined by counsel under the control of the Tribunal.
37.
On 16 June 2008, in accordance with the procedural calendar amended by the Tribunal in Procedural Order No. 2, the Respondent filed its Counter-Memorial on Liability, with accompanying documentation. The accompanying documentation included, inter alia, witness statements of Ministers Pablo Terán and Iván Rodríguez and of Mr. Felipe Sánchez. It also included an Expert Report by Mr. Timothy Martin and a Third Expert report by Dr. Juan Pablo Aguilar Andrade. In accordance with ICSID Arbitration Rule 40, the Respondent's Counter-Memorial also included a Counterclaim.
38.
On 11 August 2008, the Claimants filed a Reply on Liability, with accompanying documentation. The accompanying documentation included, inter alia, a Fifth Expert Report from Dr. Hernán Pérez Loose; Expert Reports from Messrs. Andrew B. Derman and Norman E. Maryan Jr.; First Witness Statements from Messrs. Derek Aylesworth, Ian Davis and Gary Guidry; Second Witness Statements from Messrs. Steven Bell, John L. Keplinger, Paul MacInnes and Casey Olson; and Third Witness Statements from Messrs. Fernando Albuja, Gerald Ellis and Andrew Patterson. The Claimants' Reply included a Response to the Respondent's Counterclaim.
39.
On 9 September 2008, the Tribunal issued its Decision on Jurisdiction. In its Decision, which forms an integral part of the present Award and is attached to it as Annex 3, the Tribunal addressed the two jurisdictional challenges raised by the Republic of Ecuador, namely: (a) that the adjudication of the parties' dispute was governed by the Participation Contract, which excluded caducidad from arbitration; and (b) that the Claimants failed to comply with the 6-month cooling-off period required under the BIT. In its conclusions, the Tribunal, unanimously, ruled that (a) "based on elementary principles of contract interpretation, any exception to the availability of ICSID arbitration for the resolution of disputes arising under the Participation Contract, in this case caducidad -related disputes, requires clear language to this effect. Had the parties wished to exclude such disputes from ICSID jurisdiction and confer exclusive jurisdiction to the Ecuadorian administrative courts in this regard, they could have done so. They did not and the Tribunal will not imply such wording in the clause;" and (b) that "the caducidad procedure at issue in this arbitration was in fact initiated in 2004. As noted earlier, for some 18 months or so prior to the issuance of the actual Caducidad Decree on 15 May 2006, OEPC made a number of submissions seeking to rebut the allegations on the basis of which the caducidad procedure was initiated, but to no avail. Furthermore, the Tribunal accepts, albeit without prejudging the merits, that attempts at reaching a negotiated solution were indeed futile in the circumstances."
40.
The Tribunal accordingly declared that it had jurisdiction over OEPC's and OPC's claims in this arbitration and that the arbitral proceedings would continue to the merits phase in accordance with the calendar established in the Tribunal's Procedural Order No. 1 as modified by Procedural Order No. 2.
41.
On 19 September 2008, the Respondent filed a Rejoinder on Liability, with accompanying documentation, which included, inter alia, a Witness Statement from Mr. Ángel Basantes; Second Witness Statements from Ministers Iván Rodríguez and Pablo Terán; a Third Witness Statement from Mr. Wilson Pastor Morris; an Expert Report from Dr. Marcelo Merlo Jaramillo; a Second Expert Report from Mr. Timothy Martin; and a Fourth Expert Report by Dr. Juan Pablo Aguilar Andrade. The Respondent's Rejoinder included a Reply on its Counterclaim.
42.
On 23 September, 10 October and 20 October 2008, the Tribunal issued Procedural Orders No. 3, 4 and 5 concerning production of documents.
43.
By letter of 27 October 2008, the Tribunal fixed the venue and dates for a hearing on liability. The hearing would be held at the seat of the Centre in Washington, D.C., from 13 to 20 December 2008.
44.
On 14 November 2008, the Claimants filed a Rejoinder to the Respondent's Counterclaim, with accompanying documentation. The accompanying documentation included, inter alia, a Sixth Expert Report from Dr. Hernán Pérez Loose; a Second Expert Report from Mr. Andrew B. Derman; a Second Expert Report from Mr. Norman E. Maryan Jr.; and a Fourth Witness Statement from Mr. Gerald Ellis.
45.
On 2 December 2008, the Tribunal issued Procedural Order No. 6 concerning the hearing on liability and objections raised by the Respondent to certain sections of the Claimants' Rejoinder to Respondent's Counterclaim.
46.
As scheduled, a hearing on liability was held at the seat of the Centre in Washington D.C. from 13 through 20 December 2008. The three members of the Tribunal, Mr. L. Yves Fortier, Professor Brigitte Stern and Mr. David A.R. Williams, attended the hearing. Mr. Gonzalo Flores, Secretary of the Tribunal, and Ms. Renée Thériault, Assistant to the Tribunal, were also present during the hearing.
47.
During the hearing, the Claimants were represented by Mr. Donald P. de Brier, Executive Vice-President and General Counsel of Occidental Petroleum Corporation, Ms. Laura Abrahamson, OPC's Assistant General Counsel, Mr. Jaime Alarcón from OPC and Messrs. David W. Rivkin, Gaëtan Verhoosel, Claudio D. Salas, Marco Serrano, Max Drawe and Marshall Weber and Ms. Carmen Martinez López from Debevoise & Plimpton LLP.
48.
During the hearing, the Republic of Ecuador was represented by Dr. Diego García Carrión, Ecuador's Procurador General del Estado ; Messrs. Álvaro Galindo, Francisco Paredes and Luis Alberto Cabezas-Klaere from the office of the Attorney General, Messrs. Eduardo Silva Romero, Pierre Mayer, José Manuel García Represa, George Foster and Bernard Powell, from Dechert LLP, Messrs. George von Mehren, Stephen P. Anway, David Alexander, Pedro Martinez-Fraga and Ms. Ann Catherine Kettlewell, Ms. Karen van Horn and Ms. Danielle Sundberg from Squire, Sanders (US) LLP, Mr. Ronald E. Goodman, from Foley Hoag LLP; Messrs. Andrés Donoso, Francisco Ricaurte and Ms. Triana Vásquez, Ms. Titha Moreno and Dr. María Angélica Martinez, from PetroEcuador.
49.
During the hearing, Messrs. Rivkin and Verhoosel addressed the Tribunal on behalf of the Claimants. Messrs. García Carrión, von Mehren, Silva Romero and Mayer addressed the Tribunal on behalf of the Respondent. During the eight-day hearing, the following twenty-one witnesses and experts were examined by counsel, under the control of the Tribunal: Paul McInness, Casey Olson, Steven Bell, Andrew Patterson, Fernando Albuja, John Keplinger, Gary Guidry, Ian Davis, Gerald Ellis, Derek Aylesworth, Pablo Terán, Luis Felipe Sánchez, Ángel Basantes, Iván Rodriguez, Wilson Pastor Morris, Hernán Pérez Loose, Marcelo Merlo, Juan Pablo Aguilar Andrade, Andrew Derman, Norman Maryan Jr., and Timothy Martin.
50.
By letter of the Respondent dated 9 January 2009, the parties informed the Tribunal of their agreement on a briefing schedule for the quantum phase of the proceeding. Pursuant to this agreement, which was confirmed by the Claimants' email of 15 January 2009, the Respondent would file a Counter-Memorial on Quantum on 9 March 2009; the Claimants would file a Reply on Quantum on 12 June 2009; the Respondent would file a Rejoinder on Quantum on 8 September 2009; and the Claimants would file a Rejoinder on Counterclaim Damages on 15 October 2009. Finally, in accordance with the parties' agreement, a hearing on quantum would be held in November 2009. The parties were informed of the Tribunal's approval of the agreed timetable by email from the Secretary of the Tribunal on 16 January 2009.
51.
In accordance with the Tribunal's instructions at the closing of the hearing on liability, both parties filed post-hearing briefs, with accompanying documentation, on 13 February 2009. Also in accordance with the Tribunal's instructions, on 26 February 2009, the parties' filed a Joint Chronology of Relevant Events.
52.
In accordance with the agreed timetable, on 9 March 2009, the Respondent filed a Counter-Memorial on Quantum and a Memorial on Counterclaim Damages, with accompanying documentation. The accompanying documentation included, inter alia, a Witness Statement from Mr. Alberto Panchi; a Fourth Witness Statement from Mr. Wilson Pastor Morris; and Expert Reports of from Mr. Daniel Johnston, RPS Scotia, Mr. Alfredo Corral Borrero and Mr. Hernán Salgado Pesantes.
53.
On 20 and 21 March 2009, the Tribunal held a hearing with the parties at the offices of the World Bank in Paris. The hearing was a continuation of the hearing on liability held in Washington, D.C. in December 2008. The three members of the Tribunal, Mr. L. Yves Fortier, Professor Brigitte Stern and Mr. David A.R. Williams, attended the hearing. Mr. Gonzalo Flores, Secretary of the Tribunal, and Ms. Renée Thériault, Assistant to the Tribunal, were also present at the hearing.
54.
During the hearing, the Claimants were represented by Mr. Donald P. de Brier and Ms. Laura Abrahamson from OPC, Messrs. David W. Rivkin, Gaëtan Verhoosel, Marco Serrano and Claudio D. Salas (by video-conference) and Ms. Carmen Martinez López, Ms. Ruth Miller and Ms. Marjorie Menza (by video-conference) from Debevoise & Plimpton LLP. Also present during the hearing was Dr. Hernán Peréz Loose, the Claimants' legal expert.
55.
During the hearing, the Republic of Ecuador was represented by Dr. Diego García Carrión, Ecuador's Procurador General del Estado ; Messrs. Álvaro Galindo and Francisco Paredes and Ms. Claudia Salgado from the Office of Ecuador's Attorney General, Messrs. Eduardo Silva Romero, Pierre Mayer, José Manuel García Represa, George Foster and Ms. Natalia Belomestnova, from Dechert LLP; Messrs. George von Mehren and Stephen P. Anway, from Squire, Sanders (US) LLP; and Dr. Wilson Narvaez and Ms. Triana Vasquez from PetroEcuador.
56.
During the hearing, Messrs. Rivkin and Verhoosel addressed the Tribunal on behalf of the Claimants. Messrs. García Carrión, von Mehren, Silva Romero and Mayer addressed the Tribunal on behalf of the Respondent. At the end of the hearing, the President of the Tribunal informed the parties that, while the Tribunal would attempt to issue a decision on liability before the scheduled quantum hearing in November 2009, there were many sizable and important issues to be considered. Therefore, the parties should continue to prepare for the quantum hearing, regardless of whether or not it may be necessary as a result of the decision on liability.
57.
By letter dated 4 May 2009, counsel for the Claimants informed the Tribunal that Mr. Gaëtan Verhoosel and Ms. Carmen Martinez López had joined the law firm of Covington and Burling LLP, but that they would continue to form part of the Claimants' representation.
58.
On 12 June 2009, the Claimants filed a Reply on Damages and Counter-Memorial on Counterclaim Damages, with accompanying documentation. The accompanying documentation included, inter alia, a Fourth Witness Statement from Mr. Fernando Albuja, a Second Witness Statement from Mr. Ian Davis, a Fifth Witness Statement from Mr. Gerald Ellis, a Third Witness Statement from Mr. Paul MacInnes, a Witness Statement from Mr. John W. Morgan, a Fourth Witness Statement from Mr. Andrew Patterson, a Second Witness Statement from Dr. Surendra Singh, a Seventh Expert Report from Dr. Hernán Pérez Loose, a Supplemental Expert Report from Netherland, Sewell & Associates, and a Rebuttal Expert Report from Prof. Joseph P. Kalt.
59.
By letter of 11 August 2009, the Respondent objected to the admissibility of some of the Claimants' claims. By letter of 20 August 2009, the Claimants filed observations to the Respondent's objections. On 27 August 2009, the Respondent replied to the Claimants' response. On 28 August 2009, the Claimants filed a rebuttal.
60.
On 31 August 2009, the Tribunal issued Procedural Order No. 7 concerning the Respondent's challenge to the admissibility of some of the Claimants' claims.
61.
On 8 September 2009, the Respondent filed a Rejoinder on Quantum and Reply on Counterclaim Damages, with accompanying documentation, which included, inter alia, a Fifth Witness Statement of Mr. Wilson Pastor Morris; a Second Witness Statement from Mr. Alberto Panchi; a Fifth Expert Report from Dr. Juan Pablo Aguilar Andrade; a Second Expert Report from Mr. Alfredo Corral Borrero; a Rebuttal Expert Report from Mr. Daniel Johnston; a Second Expert Report from Mr. Hernán Salgado Pesantes; and a Rebuttal Expert Report from RPS Scotia.
62.
On 21 September 2009, the Tribunal informed the parties by letter that it would not be in a position to issue its findings on liability prior to the hearing on quantum in November 2009. On 2 October 2009, the Tribunal held a pre-hearing telephone conference with the parties. The conference was recorded and copies of the audio recordings were provided to the parties and the members of the Tribunal.
63.
On 5 October 2009, the Tribunal issued Procedural Order No. 8 concerning production of documents.
64.
On 15 October 2009, the Claimants filed their Rejoinder on Counterclaim Damages, with accompanying documentation.
65.
By email of 16 October 2009, the Claimants informed the Tribunal that, as requested during the 2 October 2009 telephone conference, the parties had reached an agreement as to the manner in which to conduct the hearing on quantum.
66.
On 29 October 2009, the parties, as requested by the Tribunal, simultaneously filed Pre-Hearing Skeleton Briefs. On 30 and 31 October 2009, both parties filed additional exhibits in respect of the hearing on quantum.
67.
On 3-7 November 2009, the Tribunal held a hearing on quantum with the parties at the offices of the World Bank in Paris. The three members of the Tribunal, Mr. L. Yves Fortier, Professor Brigitte Stern and Mr. David A.R. Williams, attended the hearing. Mr. Gonzalo Flores, Secretary of the Tribunal, and Ms. Renée Thériault, Assistant to the Tribunal, were also present at the hearing. At the beginning of the hearing, the Tribunal confirmed that (as the parties had previously been informed), despite sustained deliberations it had not proved possible for the Tribunal to issue its decision on liability prior to the commencement of the quantum hearing. This possibility was foreshadowed at the liability hearing and, as the dates for the quantum hearing had been set for a considerable time, they had decided nevertheless to proceed with the hearing.
68.
During the hearing, the Claimants were represented by Mr. Donald P. de Brier, Ms. Laura Abrahamson, Ms. Melissa Schoeb and Mr. Diego Cattani from OPC; Messrs. David W. Rivkin, Marco Serrano, William Castledine and Claudio D. Salas and Ms. Marjorie Menza and Ms. Ruth Miller from Debevoise & Plimpton LLP; and by Mr. Gaëtan Verhoosel and Ms. Carmen Martinez López of Covington & Burling LLP.
69.
During the hearing, the Republic of Ecuador was represented by Dr. Diego García Carrión, Ecuador's Procurador General del Estado ; Messrs. Álvaro Galindo and Francisco Paredes from the Office of Ecuador's Attorney General; Messrs. Pierre Mayer, Eduardo Silva Romero, José Manuel García Represa, Philip Dunham, José Caicedo Demoulin, Juan Felipe Merizalde Urdaneta, Octavio Fragata Martins de Barros and Mr. Erik Johnston, from Dechert LLP; Messrs. George von Mehren, Howard Nicols, Dave Alexander and Ms. Sarah Rathke and Ms. Karen van Horn from Squire, Sanders (US) LLP; Cptn. Jorge Abarca from PetroEcuador; and Dr. Andrés Donoso from Petroamazonas.
70.
During the hearing, Messrs. Rivkin and Verhoosel addressed the Tribunal on behalf of the Claimants. Messrs. García Carrión, von Mehren, Silva Romero, Mayer and Nicols and Ms. Rathke addressed the Tribunal on behalf of the Respondent.
71.
During the six-day hearing, the following seventeen witnesses and experts were examined by counsel under the control of the Tribunal: Fernando Albuja, S.P. Singh, John W. Morgan, Paul McInness, Ian Davis (by video-conference), Andrew Patterson, Gerald Ellis, Alberto Panchi, Wilson Pastor Morris, Hernán Pérez Loose, Hernán Salgado Pesantes, Juan Pablo Aguilar Andrade, Alfredo Corral Borrero, Lee George, Gene B. Wiggins, Joseph P. Kalt and Daniel Johnston.
72.
On 18 December 2009, in accordance with the Tribunal's instructions, the parties simultaneously filed (a) Post-Hearing Briefs on Quantum and (b) Post-Hearing Briefs on the Impact of Law 42 (HCL Amendment) and the VAT Interpretative Law on Quantum, with accompanying documentation. The Respondent's accompanying documentation included, inter alia, a Third Expert Report from Mr. Daniel Johnston.
73.
On 22 January 2010, the parties simultaneously filed (a) Reply Post-Hearing Briefs on Quantum and Counterclaim Damages, and (b) Reply Post-Hearing Briefs on the Impact of Law 42 (HCL Amendment) and the VAT Interpretative Law on Quantum, with accompanying documentation.
74.
On 4 February 2010, the Tribunal held a second hearing on quantum (closing arguments) at the seat of the Centre in Washington, D.C. The three members of the Tribunal, Mr. L. Yves Fortier, Professor Brigitte Stern and Mr. David A.R. Williams, attended the hearing. Mr. Gonzalo Flores, Secretary of the Tribunal, and Ms. Renée Thériault, Assistant to the Tribunal, were also present at the hearing.
75.
During the hearing, the Claimants were represented by Mr. Donald P. de Brier, Ms. Laura Abrahamson and Mr. Gerald Ellis from OPC; Messrs. David W. Rivkin, Marco Serrano and Claudio D. Salas and Ms. Marjorie Menza and Ms. Kimberley Dettman of Debevoise & Plimpton LLP; and by Mr. Gaëtan Verhoosel and Ms. Carmen Martinez López of Covington & Burling LLP.
76.
During the hearing, the Republic of Ecuador was represented by Dr. Diego García Carrión, Ecuador's Procurador General del Estado, Messrs. Álvaro Galindo, Francisco Paredes and Felipe Aguilar from the Office of Ecuador's Attorney General, Messrs. Pierre Mayer, Eduardo Silva Romero, José Manuel García Represa, Philip Dunham and José Caicedo Demoulin from Dechert LLP; Messrs. George von Mehren, Howard Nicols and Christopher Panek and Ms. Sarah Rathke and Ms. Rachel Harris from Squire, Sanders (US) LLP, and Messrs. José Murillo and Geovanny Nuñez from PetroEcuador.
77.
During the hearing, Messrs. Rivkin and Verhoosel addressed the Tribunal on behalf of the Claimants. Messrs. García Carrión, von Mehren, Silva Romero, Mayer, Nicols and García Represa addressed the Tribunal on behalf of the Respondent.
78.
On 15 February 2011, the President of Tribunal wrote to the parties as follows:

... The Tribunal has reached the point in its deliberations where it requires the assistance of both parties' experts, Mr. Joseph Kalt and Mr. Daniel Johnston, in order to help the Tribunal assess the proper calculation of damages.

Therefore, in accordance with Rule 34 (2) of the ICSID Arbitration Rules, the Tribunal calls upon the parties to produce Messrs. Kalt and Johnston for consultation with the Tribunal at the ICSID's headquarters in Washington at 10.30 a.m. on Wednesday, 27 April 2011. If the parties agree, the Tribunal would wish to consult with the parties' experts alone without the presence of counsel.

79.
On 23 February 2011, the President of the Tribunal, in response to the parties' reply to his letter of 15 February 2011, wrote to the parties as follows:

On behalf of the Tribunal, I acknowledge receipt of the parties' replies the contents of which have been noted.

To be clear, the Tribunal reiterates that its deliberations are continuing. The Tribunal requests the parties to protect the date of 27 April 2011 for consultation with Messrs. Kalt and Johnston. Again, to be clear, this consultation will not take place without the presence of counsel unless both parties agree.

Finally, the Tribunal notes that both parties request that they be informed of the issues it wishes to discuss with their experts. The Tribunal agrees. This information will be communicated to the parties after the consultation of 27 April 2011 has been definitely confirmed. The parties are invited to confirm by Monday, 7 March 2011, their and the experts' availability on the proposed date...

80.
On 11 March 2011, the Tribunal issued Procedural Order No. 9, concerning the production of further expert evidence. In its Order, the Tribunal noted that "[i]n the event the Tribunal, after it concludes the first phase of its deliberations, makes a positive finding of liability, it will be required to determine the fair market value of Block 15 as of 16 May 2006. [T]o assist the Tribunal in its continuing deliberations, the Tribunal deems it necessary to require the assistance of the parties' experts with respect to certain issues regarding the determination of the fair market value of Block 15 as of 16 May 2006." Accordingly, the Tribunal invited the parties' experts, Professor Kalt and Mr. Johnston, "to confer and produce jointly a report estimating the fair market value of Block 15 as of 16 May 2006, using the discounted cash flow method." The Tribunal further established a procedure for the parties to comment on the experts' joint report and declared the consultation date of 27 April 2011 vacated.
81.
As requested by the Tribunal, on 11 April 2011, the parties' experts, Professor Joseph P. Kalt and Mr. Daniel Johnston, issued a Joint Expert Report, which was circulated to the parties and the members of the Tribunal.
82.
In accordance with the Tribunal's instructions in Procedural Order No. 9, both parties submitted observations on the Experts' Joint Report on 18 April 2011.
83.
On 1 May 2011, the Tribunal informed the parties of its decision to hold a hearing at the seat of the Centre in Washington D.C. with the parties and their experts Professor Kalt and Mr. Johnston.
84.
On 13 May 2011, the Tribunal issued Procedural Order No. 10, providing the parties' instructions with respect to the organization of a one-day hearing to be held on 30 June 2011 at the seat of the Centre in Washington D.C. In this Order, the Tribunal requested that Professor Kalt and Mr. Johnston confer again and produce jointly to the Tribunal, by 10 June 2011, a supplemental report addressing the parties' comments. The two experts were asked by the Tribunal to be present at the 30 June hearing to assist the Tribunal and answer questions which may be put to them by the Tribunal.
85.
On 10 June 2011, Professor Kalt and Mr. Johnston submitted to the parties and the Tribunal their Supplemental Joint Expert Report. On 17 June 2011, both parties filed observations on the Experts' Supplemental Joint Report, as directed in Procedural Order No. 10.
86.
On 20 June 2011, the Tribunal issued Procedural Order No. 11, with further directions to the parties' experts.
87.
On 24 June 2011, Professor Kalt and Mr. Johnston, pursuant to the terms of Procedural Order No. 11, submitted to the parties and the Tribunal a Second Supplemental Joint Expert Report.
88.
As scheduled, the Tribunal held a one-day hearing at the seat of the Centre in Washington D.C. on 30 June 2011. The three members of the Tribunal, Mr. L. Yves Fortier, Professor Brigitte Stern and Mr. David A.R. Williams, attended the hearing. Mr. Gonzalo Flores, Secretary of the Tribunal, and Ms. Renée Thériault, Assistant to the Tribunal, were also present at the hearing.
89.
During the hearing, the Claimants were represented by Ms. Laura Abrahamson and Messrs. Paul MacInnes and Gerald Ellis from OPC; David W. Rivkin, Greg Senn, Julian S. Manu-Sarbeng, Vonn Ricks and Kirk Monroe and Ms. Marjorie Menza and Ms. Bethany A. Davis Noll of Debevoise & Plimpton LLP. The Claimants' expert, Professor Joseph P. Kalt, Mr. Stephen Makowka and Ms. Nandana Thomas, from Compass Lexecon, were also present during the hearing.
90.
During the hearing, the Republic of Ecuador was represented by Dr. Diego García Carrión, Ecuador's Procurador General del Estado, Mr. Francisco Grijalva, Ms. Christel Gaibor and Ms. Gianina Osejo from the Office of Ecuador's Attorney General; Messrs. George von Mehren, Howard Nicols and Ms. Rachel Harris from Squire, Sanders (US) LLP; Messrs. Eduardo Silva Romero, Philip Dunham and Álvaro Galindo from Dechert LLP. The Respondent's expert, Mr. Daniel Johnston, as well as Messrs. Erick Johnston and René Daigre were also present during the hearing.
91.

At the beginning of the hearing, the President of the Tribunal made the following statement:3

As the parties will recall, on 15 February 2011, the tribunal informed the parties that it had reached the point in its deliberations both as to liability and quantum where it required the assistance of both parties' respective quantum experts, Professor Joseph Kalt and Mr. Daniel Johnston. More specifically, the tribunal stated that, in the event, after it concludes the first phase of its deliberations, it should make a positive finding of liability, it will be required to determine the fair market value of Block 15 as of 16 May 2006. If it decided -- if it decided to use the discounted cash flow method in order to estimate this value, the tribunal formed the view that Professor Kalt and Mr. Johnston, who had given evidence earlier on the use of that method, could answer certain specific questions and help it with certain calculations.

During the hearing, the members of the Tribunal posed questions to the parties' experts and counsel.

92.

On 6 October 2011, the President of the Tribunal wrote, on behalf of the Tribunal, to the parties as follows:

Members of the Tribunal continue their intense deliberations. The Tribunal regrets that its decision has taken longer to finalize than it would have wished. However, the parties have submitted to the Tribunal, in their extensive written and oral submissions, a myriad of factual and legal issues which all need to be analyzed and determined. The Tribunal is confident that its deliberations will end soon and a decision issued shortly thereafter.

In recent days, the Tribunal has been addressing an issue which, in its view, neither party has dealt with comprehensively in its prior submissions. The issue concerns the interpretation of the Farmout Agreement and the Joint Operating Agreement.

The Respondent submits […] that the calculation of damages (if any) to be awarded to the Claimants in the circumstances must be limited to a 60% interest in Block 15 because of the transfer by the Claimants to AEC under the terms of the Farmout Agreement of 40% of their interest under the Participation Contract. The Claimants do not accept the Respondent's contention […]

The governing law clause of the Farmout Agreement provides:

This Agreement shall be governed by and construed, interpreted and applied in accordance with the laws of the State of New York, United States of America, excluding any choice of law rules or conflict of law principles which would refer the matter to the laws of another jurisdiction, except to the extent that the laws of Ecuador require application of the laws of Ecuador to the Participating Agreements and Block 15 or other property situated in or operations or activities conducted in Ecuador.

The Tribunal notes that the Claimants argued that the transfer of the "economic interest" to AEC would not be considered an assignment under New York law and that, as a result, the non-assignment clause in Article 16(1) of the Participation Contract was not breached [...]. Accordingly, the Claimants did not analyze the effect and validity of an assignment, (assuming an assignment had indeed occurred as a result of the Farmout Agreement and the Joint Operating Agreement), in breach of Article 16(1) of the Participation Contract and Article 79 of the Hydrocarbons Law. In addition, the Claimants did not analyze Ecuadorian and New York law in this regard. The Tribunal further notes that the Respondent argued that New York law is irrelevant to the issue of whether an assignment under the Farmout Agreement and the Joint Operating Agreement (if any) is in breach of Ecuadorian law (CounterMemorial on Liability, para 185).

In sum, neither party, in their quantum submissions, referred to the effect of Article 79 of the Hydrocarbons Law or Article 16(1) of the Participation Contract on the assumption that an assignment of rights occurred as a result of the Farmout Agreement and the Joint Operating Agreement.

The Tribunal now invites the parties to assume that an assignment of rights did occur as a result of the Farmout Agreement and the Joint Operating Agreement. On the basis of this assumption, the parties are requested to undertake a detailed analysis of the effect of an assignment of rights made under a contract governed by New York law (i.e. the Farmout Agreement and the Joint Operating Agreement) in violation of a non-assignment clause set forth in a contract governed by Ecuadorian law (i.e. Article 16(1) of the Participation Contract) and in violation of Article 79 of the Hydrocarbons Law. The parties are further requested to address both New York law and Ecuadorian law and to make submissions accordingly, even if one or both parties may consider that, for any reason, New York law and/or Ecuadorian law may not be relevant to the determination of the effect of the Farmout Agreement and the Joint Operating Agreement.

The parties' submissions will be exchanged simultaneously and submitted to the Tribunal within 28 days from this date. The Tribunal will then decide whether reply briefs are necessary.

While the parties may refer to new legal authorities with their respective submissions, they may not file any document which is not already in the record.

93.
On 3 November 2011, the parties simultaneously filed briefs in response to the Tribunal's directions of 6 October 2011. As directed by the Tribunal, the parties filed simultaneously reply briefs on 22 November 2011.
94.
On 16 December 2011, Ms. Thériault, the assistant to the Tribunal, left the successor law firm to Ogilvy Renault, Norton Rose OR, and thus ceased her functions.
95.
On 23 February 2012, the President of the Tribunal wrote, on behalf of the Tribunal, to the parties as follows:

...Members of the Tribunal have now conferred on whether to schedule a hearing in person, as requested by the Respondent, in order to address orally the issues raised by the Tribunal in its communication of 6 October 2011 to the parties and then briefed extensively by them in the submissions of 3 and 22 November 2011.

While the Tribunal remains of the view that a hearing is not necessary, it notes that the Claimants, in their communication of 20 February, stated that they had no objection to a hearing. In the circumstances, the Tribunal has decided to accede to the Respondent's request and schedule peremptorily a hearing in London on Thursday 12 April 2012. The Hearing will commence at 10 a.m. and end at 5 p.m.

The parties are invited to confer and agree a timetable for the hearing which they will communicate to the Tribunal by 23 March 2012.

The parties are put on notice now that, immediately after the hearing of 12 April, the Tribunal will declare the proceeding closed in accordance with ICSID Arbitration Rule 38.

96.
In accordance with the Tribunal's directions, a hearing with the parties was held in London, United Kingdom on 12 April 2012. The three members of the Tribunal, Mr. L. Yves Fortier, Professor Brigitte Stern and Mr. David A.R. Williams, attended the hearing. Mr. Gonzalo Flores, Secretary of the Tribunal was also present at the hearing.
97.
During the hearing, the Claimants were represented by Mr. Donald P. de Brier, Ms. Laura Abrahamson, Mr. Michael L. Preston and Mr. Gerald Ellis from OPC; Messrs. David W. Rivkin and Ms. Marjorie Menza of Debevoise & Plimpton LLP; Messrs. Gaëtan Verhoosel and James O'Shea and Ms. Carmen Martinez López of Covington & Burling, LLP.
98.
During the hearing, the Republic of Ecuador was represented by Dr. Diego García Carrión, Ecuador's Procurador General del Estado, Ms. Christel Gaibor and Ms. Gianina Osejo from the Office of Ecuador's Attorney General; Messrs. George von Mehren, and Stephen P. Anway from Squire, Sanders (US) LLP.; Messrs. Eduardo Silva Romero and Pierre Mayer and Ms. Audrey Caminades from Dechert LLP; and H.E. Ambassador Ana Albán, Ecuador's Ambassador to the United Kingdom.
99.
During the hearing, Messrs. Rivkin and Verhoosel addressed the Tribunal on behalf of the Claimants. Dr. García Carrión and Messrs. von Mehren, Anway, Silva Romero and Mayer addressed the Tribunal on behalf of the Respondent.
100.
At the end of the hearing, the President of the Tribunal, in accordance with ICSID Arbitration Rule 38(1), declared the proceedings closed and invited the parties to submit statements of the costs incurred by them in the conduct of these proceedings.
101.
In accordance with the Tribunal's instructions, the parties simultaneously filed their Statements of Costs and Fees on 30 April 2012 (revised by Respondent on July 9, 2012 and by Claimants on July 16, 2012).
102.
As the procedural history of this case makes abundantly clear, this proceeding has been very lengthy. In fact, the procedural history of this arbitration set out above is not meant to be exhaustive. From the outset, the parties have raised a myriad of legal and factual issues pertaining to provisional measures, jurisdiction, merits and liability. In addition, the Tribunal, throughout this arbitral proceeding, has been required to address numerous procedural requests and applications, all of which were extensively and diligently briefed by the parties, resulting in literally thousands of pages of submissions and exhibits. The Tribunal considers it unnecessary to describe these submissions beyond the account set forth above.
103.
As has been seen, the Tribunal has issued a 47 page Decision on the Claimants' Application for Provisional Measures, a 44 page Decision on Jurisdiction and 11 important Procedural Orders. The Claimants have submitted 32 statements by 14 witnesses and 15 reports by 5 experts. For its part, the Respondent has submitted 18 statements by 11 witnesses and 17 reports by 7 experts. The Claimants have filed 662 exhibits and 667 legal authorities and the Respondent has filed 379 exhibits and 368 legal authorities. In all, there have been 9 hearings, comprising 22 days, since the First Session of the Tribunal on 2 May 2007. The many written submissions of the Claimants consist of 2,226 pages and the written submissions of the Respondent 1,964 pages. The transcripts of all proceedings consist of 5,291 pages.
104.
The Tribunal wishes to acknowledge the dedication and professionalism of counsel for both the Claimants and the Respondent who have assisted the Tribunal throughout this arbitration.

II. FACTUAL BACKGROUND

A. Introduction

105.
This proceeding concerns various alleged breaches by Ecuador under both domestic and international law, especially under the Treaty Between the United States of America and the Republic of Ecuador Concerning the Encouragement and Reciprocal Protection of Investment (the "Treaty" or "BIT"). In addition, the Claimants rely on an agreement referred to as the "Participation Contract" dated 21 May 1999 between OEPC, Ecuador and Petroecuador in connection with the exploration and exploitation of hydrocarbons in what has been identified as "Block 15" of the Ecuadorian Amazon. The caducidad of the Participation Contract was declared by decree of the Ecuadorian Minister of Energy and Mines on 15 May 2006, resulting in termination of the Participation Contract.
106.
By way of introduction, the Tribunal recalls that the relief sought by the Claimants in their Request for Arbitration is set forth as follows:

Claimants respectfully request an award in their favor,

(a) Declaring that Respondents have breached their obligations under the Participation Contract and the Operating Agreements, the Treaty, and Ecuadorian and international law;

(b) Ordering Respondents to declare null and void the Caducidad Decree and to reinstate fully OEPC's rights under the Participation Contract and the Operating Agreements;

(c) Directing Respondents to indemnify Claimants for all damages caused as a result of their breaches, including costs and expenses of this proceeding, in amounts to be determined at the hearing, which Claimants believe will exceed US$1 billion;

(d) Directing Respondents to pay Claimants interest on all sums awarded, in amounts to be determined at the hearing, and to order any such further relief as may be available and appropriate in the circumstances.

107.
The Tribunal further recalls that, in response, the Respondent has denied the Claimants' allegations of breach and formulated a counterclaim as follows:

Ecuador respectfully requests that the Tribunal:

1. Declare that Ecuador has complied with its obligations under the Participation Contract, Ecuadorian law, and the Treaty, and dismiss all of the Claimants' claims without prejudice.

2. Declare that OEPC breached the Participation Contract by using diplomatic channels and making recourse to the U.S. Government in connection with disputes arising out of or relating to the performance of the Participation Contract in contravention of Clause 22.2.1.

3. Declare that OEPC's claims in this arbitration were not made in good faith, and to the contrary, were asserted either negligently or with the intent to cause harm to Ecuador, and did in fact cause such harm.

4. Declare that Ecuador suffered damages from OEPC's breaches of contract, malicious prosecution/abuse of rights, destruction of Block 15's operation, and failure to pay assignment fees, and order OEPC to pay such damages in an amount subject to proof;

5. Order the Claimants to pay interest on such amount at the legal rate;

6. Order the Claimants to pay the costs of this arbitration, including all costs paid to ICSID and to the Tribunal, plus Ecuador's attorneys' fees and disbursements, as well as interest on the foregoing.

108.
In order to fully understand the Tribunal's analysis and findings on liability, it is necessary to set out at some length the factual matrix disclosed by the written and oral evidence presented by the parties during this arbitration. The Tribunal will now proceed to do so.

B. OEPC's Development and Operation of Ecuador's Block 15

109.
The area of land in Ecuador known as Block 15 covers approximately 200,000 hectares and is located several hundred kilometres east of Quito in Ecuador's most prolific oil-producing region, known as the Oriente Basin, deep in the Ecuadorian Amazon rainforest.
110.
Block 15 includes, in the western part, the producing fields of Limoncocha, Yanaquincha, and the Indillana Complex, and in the eastern part, the Edén Yuturi field. The Limoncocha and Edén Yuturi fields are located partially within, and partially outside Block 15. They straddle the border between Block 15 and properties managed by Petroproducción, the operating subsidiary of Petroecuador. Under Ecuador's Hydrocarbons Law (the "HCL"), fields such as these, once declared to be common to both a contractor and Petroecuador by the Minister of Energy and Mines, must be "unitized" and run jointly by the contractor and Petroproducción pursuant to unitized field agreements.
111.
OEPC's presence in Ecuador began on 25 January 1985, when it entered into a services contract with the Corporación Estatal Petrolera Ecuatoriana (now Petroecuador).4 Pursuant to that contract, OEPC provided services related to the exploration and production of oil in Block 15 (the "Services Contract").
112.
Under the terms of the Services Contract, OEPC provided 100% of the services required to produce oil in Block 15, ranging from identifying possible deposits through exploration to producing the oil out of the ground. If OEPC discovered oil, it was reimbursed for its costs and investments pursuant to various conditions and formulas in the contract. However, 100% of the crude oil produced belonged to Petroecuador.
113.
At the time the Services Contract was signed, Block 15 remained relatively unexplored. Hence, OEPC's initial focus in the block was on identifying possible reserves for exploitation. After eight years of exploration, OEPC began production from Block 15 in 1993. In May 1993, OEPC and Petroecuador also signed a unitized field agreement for the joint operation of the Limoncocha field. That unitized field agreement was set to expire as soon as the Services Contract expired.

C. The Participation Contract

114.
In 1993, Ecuador amended its HCL to allow the negotiation of "participation contracts." At its core, a participation contract is essentially a type of production sharing agreement: the State and contractors share in the production of crude oil, with all expenditures borne by the contractor. This contractual model gave producers a stake in the production that made exploration risks more palatable. Further, it guaranteed Ecuador a profit from its production share, since it no longer had any expenses associated with oil production.
115.
OEPC and Ecuador began the negotiation of their participation contract in January 1997. The negotiations took nearly two years, and the Participation Contract was finally signed on 21 May 1999 (the previously-defined "Participation Contract"). According to Clause 1, the contracting parties were the "Republic of Ecuador, through [...] Petroecuador [...] [and] Occidental Exploration and Production Company, Ecuador Branch." Pursuant to Clause 6.1 of the Participation Contract, OEPC had the right to develop and to exploit the Indillana Complex, known as the Base Area in the Contract, until 2012, and other fields from which production began after the signing of the Participation Contract, such as the Edén Yuturi and Yanaquincha fields and potentially the Paka Sur and Paka Norte fields, until 2019.
116.
The Participation Contract, which expressly stated that it was to be "governed exclusively by Ecuadorian law," transformed the conditions under which OEPC operated in Ecuador. Pursuant to Clause 4.2 of the Participation Contract, OEPC would no longer be reimbursed for its expenditures in exploring and producing Block 15. In return for accepting the obligation to explore, develop and exploit Block 15, and being responsible for all the associated expenditures, OEPC received a share of the oil produced from Block 15, referred to as OEPC's "participation". Clause 4.3 provided that "Contractor shall invest capital and use the personnel, equipment, machinery and technology needed for the faithful performance of such activities in consideration of which Contractor shall receive, as participation, the percentage of Fiscalized Production provided for in Clause 8.1." OEPC also had various other obligations under the Participation Contract, including payment of all Ecuadorian taxes and duties; periodic reporting of certain information to Ecuador; the establishment of good relations with the community; and the protection of the environment.
117.
The amount of OEPC's participation was determined on the basis of the equation described in the above-referred Clause 8.1. That equation took into account several factors, including the field, the rate of production, and certain agreed-upon percentages. At the end of 2005, OEPC's participation was approximately 70% of the oil produced from Block 15. After payment of expenses, taxes and other assessments, however, between 1999 and 2006, OEPC allegedly received approximately 30% of total net profits.
118.
Clause 8.5 established Ecuador's participation in the oil produced from Block 15. That participation was calculated as the balance of the oil produced from Block 15 over and above OEPC's participation. Pursuant to Clause 5.1.2, OEPC was obligated to "[t]ransfer to Petroecuador the State Participation at the Fiscalization and Delivery Center."
119.
The Tribunal notes, since this provision will be referred to later in the present Award, that OEPC was allowed to dispose freely of its share of the production from Block 15 as it wished. Under Clause 5.3.2, OEPC had the right to "[r]eceive and freely dispose of Contractor participation as established in Clause 8.1 of this Participation Contract." While OEPC could freely dispose of its participation, its ability to transfer or assign its rights and obligations under the Participation Contract was subject to stringent conditions. Chapter 16 of the Participation Contract, entitled "Transfer and Assignment", sets forth these conditions in provisions which are at the heart of the parties' dispute in this arbitration. These provisions, which are considered in greater detail later in this Award, include the following:

16.1 Transfer of this Participation Contract or assignment to third parties of the rights under the Participation Contract, must have the authorization of the Corresponding Ministry, in accordance with existing laws and regulations, especially the provisions contained in Art. 79 of the Hydrocarbons Law and Executive Decrees No. 809, 2713 and 1179.

16.2 The prohibition to transfer or assign rights under this Participation Contract without the approval of the Corresponding Ministry, as determined in Art. 79 of the Hydrocarbons Law, is not an obstacle to freely trade Contractor's stock, without need of said authorization, provided that the trading of said stock does not change, modify or extinguish the legal existence of Contractor, nor constitute a decrease in its administrative, financial and technical capacities with reference to this Participation Contract.

[...]

16.4 If Contractor deems it advisable to create consortia or associations for one or several exploration and exploitation activities covered by this Participation Contract, Contractor may do so with the prior acceptance of PETROECUADOR and authorization from the Corresponding Ministry. Contractor's obligations shall continue to exist in their parts, and the companies forming the consortium or association shall be jointly and severally liable for performance of same; and for such purpose shall furnish the corresponding guarantees. A joint and several commitment shall constitute an indispensable requirement for PETROECUADOR to accept the creation of the aforementioned consortia or associations. PETROECUADOR shall continue to maintain its direct legal relations with Contractor, to demand compliance with all obligations, and to pay the agreed participation percentages.

16.5 The integration of such consortia or associations, or the withdrawal of Contractor from same, without the authorization of the Corresponding Ministry, shall constitute legal grounds for declaring the termination of this Participation Contract.

[...]

120.
The Tribunal also notes that these provisions were mirrored in the "Termination and Forfeiture [ Caducidad ]" provisions of the Participation Contract, which stated that "[t]his Participation Contract shall terminate," inter alia, as follows:

21.1.1 By a declaration of forfeiture [ caducidad ] issued by the Corresponding Ministry for the causes and following the procedure established in Articles seventy four (74), seventy five (75) and seventy six (76) of the Hydrocarbons Law, insofar as applicable.

21.1.2 Due to a transfer of rights and obligations of the Participation Contract without prior authorization from the Corresponding Ministry.

[…]

21.3 For the purposes of forfeiture and penalties, the provisions of Chapter IX of the Hydrocarbons Law shall be applicable.

121.

At this juncture, the Tribunal also observes that these provisions of the Participation Contract refer to many of the provisions of Ecuador's HCL5, in particular the following:

CHAPTER IX

Caducidad, Sanctions and Transfers

Art. 74. The Ministry of Energy and Mines may declare the caducidad of contracts, if the contractor:

[…]

11. Transfers rights or enters into a private contract or agreement for the assignment of one or more of its rights, without the Ministry's authorization;

12. Forms consortia or associations for exploration and exploitation operations, or withdraws from them, without the Ministry's authorization; and,

13. Commits repeat violations of the Law and the regulations thereto.

Art. 75. The declaration of caducidad of a contract implies the immediate return to the State of the contracted areas, and the delivery of all equipment, machinery and other exploration or production items, industrial or transportation installations, at no cost to PETROECUADOR and, also in addition, the automatic loss of bonds and securities provided under the Law and the contract, which shall remain to the benefit of the State.

Art. 76. Before caducidad of a contract is declared, the Ministry of Energy and Mines shall notify the contractor, providing it not less than thirty and not more than sixty days from the date of the notification, to perform its unmet obligations or dismiss the charges.

Art. 77. A breach of contract that does not cause caducidad effects or a violation of the Law or Regulations shall be punished with a fine imposed by the National Hydrocarbons Director, of two hundred to three thousand United States Dollars, depending on the seriousness of the violation, in addition to compensation for the damages caused.

[…]

Art. 79. The transfer of a contract or the assignment to third parties of rights derived from a contract shall be null and void and shall have no validity whatsoever if there is no prior authorization from the Ministry of Energy and Mines, without prejudice to the declaration of caducidad as provided for in this Law.

The State shall receive a premium for the transfer and the beneficiary company shall enter into a new contract under more favourable economic conditions for the State and for PETROECUADOR than the ones contained in the original contract.

As will become apparent, the provisions of Article 74(11) and Article 79 are of central importance in this case.

D. The Unitized Fields Joint Operating Agreements

122.
During the negotiation of the Participation Contract, OEPC sought to conclude an overall agreement that would allow it to receive the full benefits of operating Block 15. Thus, on the same day that the Participation Contract was signed, OEPC and Petroproducción also signed joint operating agreements for the unitized exploitation of the common reservoirs in both the Edén Yuturi and Limoncocha fields (the "Unitized Fields Joint Operating Agreements").
123.
Pursuant to Clause 3.3 of the Unitized Fields Joint Operating Agreements, OEPC and Petroproducción agreed that "[t]o obtain greater efficiency and economy in the operation, [...] the management of the Unitized Field shall be treated as part of the management of Block 15. Therefore, the same rights and obligations of the Parties under the Participation Contract, in whatever is pertinent, shall be applicable to this Operational Agreement."
124.
There was one significant change to the terms of the Participation Contract with respect to these unitized fields. For the Limoncocha and Edén Yuturi fields, OEPC was not deemed the sole operator. Rather, unlike Clause 4.2 of the Participation Contract, which gave OEPC the "exclusive right" to develop and to produce from Block 15, Clause 5.1 of the Unitized Fields Joint Operating Agreements provided that "[u]nder the scheme of Joint Management, Contractor and PETROPRODUCCION constitute the Operator for the Unitized Field[s], starting on the Effective Date of this Operational Agreement."
125.
This joint operatorship was achieved through the establishment of a joint operating committee (the "Unitized Fields Committee"), which was the executive body charged with managing the joint operation of the Limoncocha and Edén Yuturi fields. Among other things, the Unitized Fields Committee approved the budgets and development plans, and was informed of the daily operations in the unitized fields.
126.
The Tribunal observes that when the Participation Contract and the Unitized Fields Joint Operating Agreements were signed in 1999, OEPC was producing approximately 28,000 barrels per day from Block 15. After the signature of these agreements, OEPC began a significant capital expenditure program in Block 15 and allegedly increased daily production from Block 15 from approximately 28,000 barrels per day to over 100,000 barrels per day, a level of production it maintained through 2006. Production from the Edén Yuturi field allegedly accounted for the majority of this increase. During this period, the field was thus brought from being entirely undeveloped to producing 70% of the oil produced from Block 15.

E. The Farmout with AEC

127.
In order to finance the expansion of its operations in Ecuador, OEPC sought an arrangement that could provide the necessary funds, as well as diversify and reduce its exposure. At the same time, Alberta Energy Corporation Ltd. ("AEC"), through the related entity AEC International ("AECI" or "AEC"), was looking to expand its investments in Ecuador. AEC had originally considered purchasing outright Block 15 from OEPC in 1999, together with two unrelated companies, City Investing and City Oriente, which operated blocks to the north of Block 15. However, while it did purchase the City companies that year, it did not approach OEPC about a purchase of Block 15 until 2000. On 15 May 2000, AEC made a formal proposal to OEPC to acquire OEPC's entire interest in Block 15. OEPC rejected AEC's proposal.
128.

AEC then proposed to "farmin" to Block 15. OEPC stated to the Tribunal that a farmout agreement with AEC was an attractive alternative because it allowed OEPC to continue to invest in Block 15 but with less of its own capital and to diversify its incountry risk. The negotiations led to the signing on 9 August 2000 of a Letter of Intent which described in some detail (at paragraph 1) the proposed farmout as a two-stage transaction as follows:

1. PROPOSED FARMIN TRANSACTION

AEC International a Business Unit of Alberta Energy Company Ltd., or its designated direct or indirect wholly owned subsidiary (collectively hereinafter referred to as "AECI"), would acquire a 40% economic interest in Block 15 by farming it to OEPC's interest as follows (the "Farmin Transaction").

(a) AECI would farmin to Block 15 to acquire a 40% economic interest in Block 15 from OEPC. The economic interest would be a "working interest" or "participating interest" except that it would not include nominal legal title to Block 15 or interest as a party to the Participation Contract. While OEPC would continue to own 100% of the legal title of the participating interest in Block 15 under the Participation Contract, OEPC would hold AECI's 40% economic interest as a "nominee" or "bare trustee" with the obligation to convey legal title, subject to government approvals, at a mutually agreeable time following AECI's payment of all amounts required to earn its interest. Prior to such conveyance, while OEPC holds AECI's interest in trust, OEPC shall be obligated to represent the interest of AECI, as if AECI were a participant with a 40% interest under the terms of a standard joint operating agreement to be mutually agreed. After such acquisition, the economic interests associated with Block 15 would be shared as follows (subject to paragraph (b) below):

OEPC 60%

AECI 40%

(b) AECI would earn its 40% economic interest by paying a total of U.S. $180 million (subject to increase as described below) towards OEPC's share of Block 15 exploration and development expenditures. This U.S. $180 million shall be paid as U.S. $70 million as described in Clause 1(c) below, plus 90% of OEPC's 60% share (the "OEPC Carry") of: (A) the total capital expenditures to be incurred in connection with the development of Block 15, including, without limitation, costs associated with the construction of ancillary pipelines or facilities related to Block 15 crude oil production and (B) costs otherwise properly incurred under the Participation Contract for drilling, exploration or exploitation (collectively, "Block 15 Capex"), for the calendar years as set forth below (each, an "Annual Carry Amount"), pursuant to the following schedule:

Calendar Year Annual Carry Amount

2001 US$50 million

2002 US$25 million

2003 US$20 million

2004 US$15 million

For each calendar year set forth above (each, a "Year") AECI shall pay its 40% share of Block 15 Capex plus the Annual Carry Amount to satisfy the OEPC Carry, and the Annual Carry Amount shall constitute a cap on AECI's obligation to pay the OEPC Carry; provided that:

(i) if AECI satisfies the OEPC Carry for any Year, then additional Block 15 Capex for such Year, shall be shared among OEPC and AECI as set forth in paragraph (a) above;

(ii) if the amount of the OEPC Carry for any Year except 2004 is less than the Annual Carry Amount for such Year, then AECI shall add 110% of the shortfall amount (the "Carry Over Amount") to the Annual Carry Amount for the following Year, thereby increasing the Annual Carry Amount for the following Year; and

(iii) if the amount of the OEPC Carry for 2004 is less than the Annual Carry Amount for such Year, then AECI shall pay to OEPC, on or before January 31, 2005, an amount equal to the shortfall amount as an advance by AECI to OEPC of OEPC's 60% share of Block 15 Capex to be incurred thereafter. AECI and OEPC shall each act in good faith and use reasonable efforts to conduct development, drilling, exploration and exploitation operations on Block 15 so as to minimize the shortfall amount for 2004.

(c) AECI shall pay to OEPC, on the Closing Date, as hereinafter defined, the sum of U.S. $70 million as an advance by AECI to OEPC of OEPC's 60% share of Block 15 Capex incurred after the Effective Date, as hereinafter defined, in excess of the OEPC Carry. Notwithstanding OEPC's obligation ultimately to use this U.S. $70 million and any shortfall amount payable to OEPC pursuant to Clause 1(b)(iii) above for its 60% share of Block 15 Capex, nothing herein shall prohibit, limit, or otherwise restrict OEPC, in the meanwhile, from loaning all or any portion of such U.S. $70 million and/or such shortfall amount to one or more of its affiliates, at a reasonable fair market interest, with such interest to be for OEPC's account and used to pay OEPC's Block 15 Capex incurred after the Effective Date in excess of OEPC Carry.

(d) The effective date of the proposed Farmin Transaction shall be August 1, 2000 (the "Effective Date"), and the closing date shall be at a time and date mutually agreed by the Parties and as soon thereafter as practicable (the "Closing Date"), subject to satisfaction or waiver of the conditions set forth in Section 5 of this letter. On the Closing Date AECI shall acquire, effective as of the Effective Date, a 40% economic interest in Block 15 and 40% of OEPC's (or its affiliate's, as the case may be) interest, if any, in the OCP Pipeline Project.

(e) Each of Alberta Energy Company Ltd. and Occidental Oil and Gas Corporations will cause their respective subsidiaries to perform their obligations under the Transaction Documents (as defined below).

(f) OEPC will be the Operator under the Joint Operating Agreement.

129.
Negotiations continued through the late summer and early fall. On 19 October 2000, the parties signed the Farmout Agreement (the "Farmout" or "Farmout Agreement"), which contained the terms originally outlined in the Letter of Intent. The parties also signed an operating agreement for the purpose of implementing the Farmout (the "Joint Operating Agreement" or "JOA" and, together with the Farmout Agreement, the "Farmout Agreements"). The parties did not, however, close the deal until 31 October 2000. The contract was made retroactive to 1 October 2000, i.e. the beginning of the fourth quarter.
130.
The Farmout, an agreement governed by the laws of New York, provided for two phases. In the first phase of the transaction AEC purchased a 40% so-called "economic interest" in Block 15. Essentially, through contributions to OEPC's Block 15 investments, AEC purchased the right to 40% of OEPC's share of Block 15's production. This stage of the Farmout was described in Article II, titled "Farmout of Interest in Farmout Property". The central provisions of Article II of the Farmout provided as follows:

Art. 2.01 Effective as of the Effective Time, and subject to obtaining required governmental approvals, if any, OEPC agrees at Closing (as defined in Section 2.06) to farm out and transfer to AECI, and AECI agrees at Closing to assume all obligations that originate, accrue or arise after the Effective Time with respect to, a 40% economic interest (the "Farmout Interest") in the Farmout Property, subject, however, to payment by AECI of the amounts required to earn such interest as hereinafter provided and subject to the terms and provisions set out hereinafter. The Farmout Interest to be transferred to AECI as of the Effective Time includes a "working interest" or "participating interest" in the Participating Agreements and Block 15 except that it does not include nominal legal title to an interest in Block 15 or an interest as a party to the Participating Agreements. OEPC shall continue to own 100% of the legal title to the Participating Agreements and to the interests in Block 15 granted or provided for in the Participating Agreements; provided that from and after the Effective Time OEPC shall hold legal title to the interest in the Farmout Property represented by the Farmout Interest of AECI in the Participating Agreements and Block 15 as a "nominee" with the obligation to convey legal title to such interest to AECI, subject to obtaining required governmental approvals, promptly following AECI's payment of all amounts required to earn the interest in the Farmout Property represented by the Farmout Interest as hereafter provided and the expenditure of such amounts by OEPC as Operator under the JOA for Block 15 Capex (as hereinafter defined). Prior to such conveyance, while OEPC holds legal title to AECI's interest in the Farmout Property on behalf of AECI, OEPC shall be obligated, at the sole risk, cost and expense of AECI, to act with respect to the Farmout Interest of AECI as AECI shall direct from time to time as if AECI were a party to the Participating Agreements owning legal title to a 40% interest in the Participating Agreements and the interests therein granted in Block 15, subject to and in accordance with the terms and provisions of the JOA provided for in Section 2.02.

[…]

Art. 2.03 For such period of time that under Ecuadorian law OEPC holds legal title to the Farmout Interest on behalf of AECI pursuant to this Agreement, OEPC and AECI recognize and agree that taxable items attributable to the Farmout Interest will be required to be included on the Ecuadorian tax returns of OEPC's branch registered in Ecuador and that OEPC will pay AECI's Farmout Interest share of Ecuadorian Tax on behalf of AECI. If Closing occurs, AECI agrees to reimburse OEPC for any Ecuadorian Taxes payable by OEPC, or its Ecuador branch, that are attributable to the Farmout Interest. [...]

[...]

Art. 2.07 If all required governmental approvals, if any, for the transfer to AECI of the Farmout Interest pursuant to Section 2.01 (being the transfer of an economic interest in the Farmout Property as provided therein as opposed to the transfer of a legal title interest as provided for in Section 4.01) have not been obtained on or before March 31, 2001 then any party hereto may elect, at its option, to terminate this Agreement by written notice of termination delivered to the other parties, whereupon this Agreement shall terminate without any further liability or obligation on the part of any party hereto. […]

131.
The second stage of the Farmout was described in Article IV of the Farmout Agreement, titled "Assignment of Legal Title." Article 4.01 provided that this phase could not occur until and unless two conditions were met: AEC had made the required payments, and the Government had given its prior authorization:

Art. 4.01 Promptly after AECI has made all payments of the OEPC Carry provided for in Sections 3.03, 3.04 and 3.05 and OEPC as Operator under the JOA has expended such amounts for Block 15 Capex, OEPC and AECI shall execute and deliver such documents as are required to convey legal title to AECI in and to a 40% economic interest in the Participating Agreements and Block 15 and to make AECI a party to the Participating Agreements as owner of such 40% economic interest (subject to obtaining required governmental approvals). Any transfer fees or administrative charges imposed by any government agency or department with respect to such transactions shall be paid by AECI.

132.
In exchange for its economic interest in the production from Block 15, AEC agreed to pay 40% of all the capital and operating expenses in developing Block 15. Article 2.02 of the Farmout provided:

As between OEPC and [AEC], [AEC] upon Closing shall be obligated and agrees to perform all obligations and to bear and pay all costs, charges, expenses and liabilities attributable to the Farmout Interest in the Participating Agreements and Block 15 [...].

133.
AEC also agreed to pay approximately $180 million towards OEPC's historical development costs. Under Article 3.02, approximately $70 million was to be paid upon Closing. Pursuant to Article 3.03, AEC's payment of the remaining amount was spread over four years according to the following schedule: $50 million in 2001, $25 million in 2002, $20 million in 2003 and $15 million in 2004.
134.
The Joint Operating Agreement refers to the Farmout at Article 3.2.1 as follows:

Pursuant to the provisions of the Farmout Agreement, AECI has on the Effective Date a forty percent (40%) interest in the Participating Agreements that until the Transfer Date shall be equivalent economically to, but shall not include, nominal legal title and, thereafter, shall include legal title. As between OEPC and AECI, AECI shall be obligated and agrees to perform all obligations and to bear and pay all costs, charges, expenses and liabilities attributable to the Farmout Interest in the Participating Agreements and Block 15, and shall be entitled to the rights and benefits attributable to such Farmout Interest, accruing from and after and attributable to periods of time after 4:00 a.m. local time in Ecuador on the Effective Date under and subject to the terms and provisions of this Agreement, in the same manner and to the same extent as if AECI held legal title to a 40% economic interest as a participant in the Participating Agreements and Block 15 as a Non-Operator under this Agreement, both prior to and after legal title to the 40% interest comprising the Farmout Interest in the Participating Agreements and Block 15 is conveyed from OEPC and AECI pursuant to Section 4.01 of the Farmout Agreement. Likewise, as between OEPC and AECI, subject to the provisions of Article III of the Farmout Agreement, OEPC shall be obligated to perform all obligations and to bear and pay all costs, charges, expenses and liabilities attributable to the remaining 60% interest in the Participating Agreements and Block 15 owned and held by OEPC for its own account, and shall be entitled to the rights and benefits attributable to such remaining 60% interest, accruing from and after and attributable to periods of time after the Effective Time under and subject to the terms and provisions of this Agreement applicable to OEPC as Operator and owner of such remaining 60% interest. This results in the following effective Participating Interests, for purposes of this Agreement.

OEPC 60%

AECI 40%

135.
Pursuant to Article 4.2.1 of the Joint Operating Agreement, OEPC, as sole operator, had "all of the rights, functions and duties of [the] Operator under the Participating Agreements [ i.e. the Participation Contract and Unitized Fields Joint Agreements] and [...]shall conduct all Joint Operations." As defined in Article 1.40 of the Joint Operating Agreement, a Joint Operation is an "operation[ ] or activit[y] carried out by [the] Operator pursuant to this Agreement for Block 15 [...], the costs of which are chargeable to all Parties."
136.
Under the Joint Operating Agreement, a two-member management committee was established, with OEPC and AEC each electing one member (the "Management Committee"). Pursuant to Article 5.2 of the Joint Operating Agreement, the Management Committee had the "power and duty to authorize and supervise Joint Operations that are necessary or desirable to fulfill the Participating Agreements and properly explore and exploit the Agreement Area in accordance with this Agreement and in a manner appropriate in the circumstances." That responsibility was to be exercised "[w]ithout prejudice to the rights and duties of Operator under this Agreement."
137.
Furthermore, Article 4.2.2 provided that "[i]n the conduct of Joint Operations Operator shall [...] [p]erform Joint Operations in accordance with the provisions of the Participating Agreements, this Agreement, and the approvals and instructions of the Management Committee not in conflict with this Agreement [...]."
138.
Finally, Article 5.13.5 provided that "[n]o decision of the Management Committee shall be binding if it conflicts with a decision by any Integrated Management Committee with Petroecuador for the Eden-Yuturi Unit or the Limoncocha Unit or any other unit in which all or any portion of Block 15 is hereafter unitized." AEC had no representation on the Unitized Fields Committee.

F. The OCP Pipeline

139.
At the time the Participation Contract was signed, the only way of bringing oil from the Oriente Basin to the coast for export was through the aging state-owned pipeline, known as the SOTE. By that time, however, the SOTE was already operating at its maximum capacity, and was not capable of transporting the heavier variety of crude that OEPC found in the Edén Yuturi field.
140.
The idea for a new pipeline running from the Oriente Basin to the coast at Esmeraldas was first considered by a consortium of foreign producers in 1998, but Ecuador eventually decided to place the contract to build the pipeline out for bid. To this end, Occidental and other foreign oil companies operating in Ecuador formed two companies, Oleoducto de Crudos Pesados (OCP) Ltd. ("OCP Ltd.") and its wholly owned operating subsidiary, Oleoducto de Crudos Pesados (OCP) Ecuador S.A. ("OCP S.A.").
141.
In August 2000, OCP Ltd. submitted its bid to construct the pipeline. Ecuador selected OCP Ltd.'s bid over the bids of two other groups in the final quarter of 2000, and the deal was finalized between November 2000 and February 2001. The OCP project was of such importance to Ecuador that the then Minister of Energy and Mines, Pablo Terán, personally conducted the negotiations.
142.
Occidental originally took a 24% equity interest in OCP Ltd. However, Occidental subsequently transferred 40% of that interest to AEC, which reduced Occidental's interest to 14.3%. Because of several further minor and unrelated revisions to OCP Ltd.'s ownership structure, Occidental's interest in OCP Ltd. was subsequently reduced to 14.15%.
143.
On 15 February 2001, OCP Ltd. and Ecuador signed the "Contract to Construct and Operate the Heavy Crude Oil Pipeline and Provision of Public Services for Transportation of Hydrocarbons" (the "OCP Contract"). Subsequently, on 3 July 2001, OCP Ltd. signed an approximately $700 million contract with Techint International Construction Corporation to build the OCP pipeline. Construction was completed in August 2003. The total cost of the OCP project was approximately $1.5 billion. The pipeline runs 500 kilometres from Lago Agrio in the Oriente Basin to Balao in the province of Esmeraldas on the Pacific coast, and ascends and descends nearly 3,000 meters in elevation during that span. It has a capacity of 450,000 barrels per day, though it has never reached that capacity. The first oil was shipped through the OCP pipeline in the fall of 2003.
144.
The OCP pipeline was financed through a combination of equity contributions by the owners of OCP Ltd., guaranteed debt, and financing from lenders. As of 2004, Occidental had made equity contributions of $78 million to the $1.5 billion project and guaranteed debt worth $118 million.
145.
OCP Ltd. secured the majority of the financing through the ship-or-pay commitments from the pipeline's users. These commitments were contained in agreements between the users and OCP S.A. called Initial Shipper Transportation Agreements ("ISTAs"). OEPC entered into such an ISTA with OCP S.A. on 30 January 2001, as subsequently amended on 29 May 2001 and 31 July 2001.
146.
Pursuant to the ship-or-pay commitments, each sponsor purchased a certain amount of pipeline capacity, and agreed to pay for that capacity, even if the sponsor did not use it. OEPC had originally planned on purchasing 70,000 barrels per day of such guaranteed capacity. Following the Farmout, however, OEPC committed in its ISTA to 42,000 barrels per day. The difference, 40% or 28,000 barrels per day, was purchased by AEC in performance of the Farmout.

G. The Farmout and Ecuador

147.
On 24 October 2000, senior executives of both OEPC and AEC flew to Quito from the United States and Canada in order to meet with the Minister of Energy and Mines, Pablo Teran, in the Minister's office. The purpose of the meeting was to inform the Minister about the Farmout and discuss the commitment to the OCP pipeline and new projects in Ecuador. Casey Olson, then Executive Vice President for Business Development of Occidental, and Paul MacInnes, then President and General Manager of OEPC, attended this meeting on behalf of OEPC. Steven Bell, then Vice President International of AEC, and Stephen Newton, then President and General Manager of AEC Ecuador, attended on behalf of AEC. Minister Teran was the only representative of Ecuador present at the meeting.
148.
There were two distinct subject matters which were addressed during the meeting and the meeting itself had two distinct phases. The purpose of the first session, which lasted about 45 minutes, was to present the Farmout to Minister Teran and was attended by both the OEPC and AEC officials. In the second session, attended only by the OEPC officials and Minister Terân, the parties discussed new projects in Ecuador that OEPC was interested in pursuing.
149.
There is much controversy in this proceeding about what was said, or not said, during the first session of this meeting. The Tribunal will analyze in a later Section of the present Award6 the meeting of 24 October and subsequent events. In this Section, the Tribunal will only set out the facts which inform the background of the arbitration.
150.
Both parties acknowledge that no copy of the Farmout Agreement or the Joint Operating Agreement were handed to Minister Terân during the meeting.
151.
The next day, on 25 October 2000, Mr. MacInnes wrote to Minister Terân regarding the previous day's meeting. Mr. MacInnes wrote that the Farmout was an "imminent transaction pursuant to which [OEPC] intends to transfer to [AEC] 40% of its economic interest in the Participation Contract." Mr. MacInnes also wrote that, following that first stage of the transaction, "OEPC will continue being the only ‘Contractor' entity under the Contract for Block 15;" and that "once [AEC] has complied with its obligations contemplated in the transfer agreement, OEPC shall transfer to [AEC] the legal title corresponding to 40% of its interests [...] subject to the approvals that the Government of Ecuador may require at that time." The letter ended with a request to the Minister to "confirm [...] [the] consent with respect to the aforementioned transfer of economic interests in favor of [AEC]."
152.
As explained later in this Award, one of the central issues in this proceeding is whether, during the meeting of 24 October 2000, Minister Terán in fact indicated that government approval was (or was not) required for the transfer of the economic interest to AEC under the Farmout. In this regard, the Tribunal notes that upon closing the Farmout on 31 October 2000, OEPC and AEC entered into a letter agreement mutually waiving satisfaction of any required government approvals for the first stage of the Farmout. That letter also expressly envisaged the requirement of government approval for the contemplated future transfer of legal title to AEC.
153.
Immediately after the Farmout's closing, on 1 November 2000, OEPC's ultimate parent, OPC, issued a press release announcing the Farmout. The press release confirmed that OEPC would remain the operator of Block 15 and that AEC would receive a 40% economic interest in the operations.
154.
Between late October and late November 2000, there were some meetings between Mr. MacInnes and Petroecuador's then Executive President, Mr. Rodolfo Barniol, during which the Farmout was mentioned.
155.
On 8 November 2000, a memorandum was sent by the Director, Operations Control to the Director of Hydrocarbons Economy in the Ministry of Energy and Mines. It read as follows:

SUBJECT: TRANSFER OF 40% OF THE ECONOMIC INTERESTS OF THE BLOCK 15 PARTICIPATION CONTRACT BY OCCIDENTAL EXPLORATION TO CITY INVESTING COMPANY

With regard to letter No. GG-014-00 dated October 25, 2000, in which Occidental reports the transfer of 40% of the economic interests in the Participation Contract for Hydrocarbons Production and Additional Exploration for Block 15, including the OEPC rights in the Unified Production Operating Agreements for the Unified Edén Yuturi and Limoncocha Fields to City Investing Company, I would like to inform you of the following:

City Investing currently has a Participation Contract with the Government in the Tarapoa Block and Fanny-18B and Mariann-4A Unified Fields and is the current operator of the aforementioned Fields. Therefore, it has proven that it has technical solvency, and for this reason, there would be no impediment for that assignment of rights.

156.

In a letter dated 22 November 2000, the Director of the National Hydrocarbons Directorate ("DNH"), Dr. Raúl Salgado, wrote to OEPC requesting information regarding the technical and financial capabilities of AEC. This letter states:

BACKGROUND:

In communication GG-014-00 dated October 25, 2000, the company you represent requests authorization to transfer 40% of the rights it has in Block 15, including the Operational Agreements for Unified Exploitation of the Unified Fields Edén Yuturi and Limoncocha, in favor of City Investing Company.

ANALYSIS:

According to stipulations in Art. 3 of Executive Decree No. 2713, published in Official Register No. 694 of May 12, 1995, in which the Regulations to Art. 79 of the Hydrocarbons Law were issued, the total or partial transfer of rights and obligations derived from a contract cannot for any reason originate the deterioration of the financial solvency or operational capacity of the contractor, nor can it negatively affect the work and investment chronogram contemplated in the original contract or the economic participation of the State and PETROECUADOR.

In view of this, the Minister of Energy and Mines, previous to the authorization to transfer said rights and obligations, must make a technical - economic analysis with the purpose of guaranteeing the work and operation of this current contract.

CONCLUSION:

The National Direction of Hydrocarbons, as a technical organism of the Ministry of Energy and Mines, requires information to guarantee the economic solvency of the company City Investing Company Limited, regarding:

Income Tax Declarations for the last two years.

Balances audited and duly notarized, for the last two years.

157.
Dr. Salgado then met with OEPC's Vice President of Government Relations, Mr. Fernando Albuja, and two other OEPC representatives on 14 December 2000 in his office to discuss OEPC's October 25 letter to Minister Teran.
158.
On 12 January 2001, Dr. Salgado sent a memorandum to Minister Teran which reads, in full, as follows:

BACKGROUND:

Through letter GG-014-00 dated October 25, 2000, Occidental Exploration and Production Company informed the Ministry of Energy and Mines of its intent to assign 40% of the rights and obligations for Block 15 to City Investing Company in the future, including the Unified Production Operating Agreements for the Unified Edén Yuturi and Limoncocha Fields.

ANALYSIS:

At a meeting held on December 14 of this year at the Department of Hydrocarbons Economy of this National Office, executives from Occidental stated that the company is negotiating with City Investing Company to transfer 40% of the rights and obligations it has in Block 15. They will report the decision when they reach a final agreement.

The representatives of this National Office explained to the company that when they decide to assign the rights, they must request authorization from the Ministry of Energy and Mines; otherwise, any participation of City Investing Company in the current contract would be null and void, as stipulated by Executive Decree No. 809 that issued the Regulations for Article 79 of the Hydrocarbons Act, published in Official Gazette No. 197 of May 31, 1985.

CONCLUSIONS:

From the explanation given by executives from Occidental Exploration and Production Company, we can conclude that the Company is not requesting authorization to transfer rights, but only reporting on a possible transaction to be made in the immediate future.

When the company decides to make that transfer, it will request the corresponding approval from the Ministry of Energy and Mines, which will be legalized after payment of the premiums for transfer and improvement of the economic conditions of the contract.

The only company that will continue to participate in the current contract with the Ecuadorian Government will be Occidental Exploration and Production Company, owner of 100% of the shares.

159.
Finally, on 17 January 2001, Minister Terân responded to OEPC's letter of 25 October 2000, noting the company's "intention to transfer in the future 40% of the rights and obligations of block 15," and indicating that such a future transfer would require prior government approval. Minister Terân also stated that OEPC "shall be the sole company that will continue participating in the current contract with the Ecuadorian State since it is the owner of 100% of the rights and obligations." This letter, which tracks language from the 12 January 2001 memorandum quoted above, reads in full as follows:

I acknowledge receipt of your letter GG-014-00, dated October 25, 2000, in which the company that you represent made know to this Minister its intention to transfer in the future 40% of the rights and obligations of block 15, including the Operating Agreements for the Unified Exploitation of the Eden-Yuturi and Limoncocha Fields in favor of City Investing Company, and further to the meeting with officers of Occidental, please be advised of the following:

Executive Decree No. 809, which contains the Regulation to Art. 79 of the Hydrocarbons Law, published in the Official Register No. 197, dated May 31, 1985, in its Article I stipulates that the total or partial transfer of rights and obligations derived from a contract may be assigned in favor of third parties with the prior authorization of the Corresponding Ministry, otherwise such transfer will be invalid and may give rise to the contract's termination.

In the meeting held at the National Directorate of Hydrocarbons, officers from Occidental said that the 40% transfer of rights and obligations previously mentioned would not be implemented at the moment, therefore once the company you represent decides to perform said transfer, you must request to this State Ministry the corresponding authorization and the issuance of the Ministerial Decree through which such transfer will be legalized, with the prior payment of the transfer fees and enhancement of the economic conditions of the contract, as it is stipulated in Art. 1 of the Executive Decree 2731, published in the Official Register No. 694, dated May 12, 1995.

It is important to point out that Occidental Exploration and Production Company shall be the sole company that will continue participating in the current contract with the Ecuadorian State since it is the owner of 100% of the rights and obligations.

160.
The record does not disclose any response on the part of OEPC to Minister Teran's letter of 17 January 2001.

H. The Moores Rowland Audit

161.
The issue of transfer of rights by OEPC to AEC surfaced again when, in 2003, the audit firm Moores Rowland Ecuador ("Moores Rowland") was retained by the DNH to conduct the audit of OEPC. During their audit, Moores Rowland analyzed invoices from OEPC to AEC for the sale of crude oil during the calendar year 2002 and, in this connection, asked OEPC on 29 January 2004 to examine the contract between OEPC and AEC in virtue of which these sales took place.
162.
Shortly thereafter, on 9 February 2004, Moores Rowland wrote to the DNH regarding the "current situation and decision of the Ministry of Energy and Mines" in connection with OEPC's "transfer in the future [of] 40% of the rights and obligations of Block 15" to AEC.
163.
Moores Rowland was then provided with unsigned but true copies of both the Farmout Agreement and the Joint Operating Agreement by Mr. Fabian Revelo of OEPC. These copies were later given by Moores Rowland to Dr. Patricia Zurita, the DNH audits coordinator.
164.
Moores Rowland requested from OEPC an executed copy of its agreements with AEC. OEPC decided not to accede to this request. The Tribunal notes the following internal OEPC email of 8 March 2004:

We are not going to provide a copy of the agreement with Encana to the DNH auditors. Informally, the DNH auditors have told us that not providing them with a copy will determine the inclusion of a paragraph called "limitación al alcance" (limitation to the audit scope). I consider we shall do nothing until the auditors issue they [ sic ] report and/or DNH request us information on the deal with AEC.

165.
On 15 March 2004, Mr. MacInnes wrote to Moores Rowland as follows:

In the year 2000, OEPC and AEC Ecuador signed an agreement by means of which, subject to satisfying certain conditions and subject to approvals required by the Ecuadorian Government, they committed themselves to transfer in the future the legal title corresponding to 40% interest in the Contract for Block 15 and the Operation Agreements for Unified Exploitation. OEPC informed this to the Ministry of Energy and Mines in letter GG-014-00 of October 25, 2000. In said communication, we also stated that the Company I represent will continue being the only one responsible for total obligations under the Participation Contract for Block 15 until the indicated conditions are fulfilled and receive the required approvals.

Consistent with the above, OEPC is the only entity that maintains signed with the Ecuadorian State the Participation Contract for Block 15, including the year 2002, period that corresponds to the Cost Auditing that the Firm Moores Rowland Ecuador Cia. Ltda. is performing in representation of the National Direction of Hydrocarbons ("DNH"). Therefore, OEPC exercised and assumed, in the year 2002, 100% of the rights and obligations derived from the Participation Contract for Block 15.

[...]

During the 2004 exercise, the conditions agreed upon between OEPC and AEC Ecuador will have been fulfilled for transfer of the legal title corresponding to 40% of the rights and obligations in the Contract for Block 15 and in the Operational Agreements for Unified Exploitation. Therefore, in accordance with letter GG-014-00 from OEPC and Official Letter No. 003-DNH-EH-CE-P1, 01-0079, issued in response by the Minister of Energy and Mines, OEPC will ask for the authorizations that may be required to make the transfer according to applicable legal, regulatory, and contractual provisions, after the referred conditions have been satisfied.

166.

As part of the audit process, Moores Rowland then requested from OEPC that they sign a representation letter. OEPC did so on 12 July 2004, and included a representation to the effect that it had provided Moores Rowland with a copy of the "Agreement with Alberta Energy Corp.":

2. We have placed at your disposal:

[...]

d) The Agreement with Alberta Energy Corp - AEC, formally City Investing, which, once the conditions set forth in such agreement have been met, and subject to the authorizations from Petroecuador and the Ministry of Energy and Mines, would culminate in the assignment of 40% of the rights and obligations of the Participation Contract for the Exploration and Exploitation of Hydrocarbons in Block 15 of the Ecuador Amazon Region and the unified fields of Edén Yuturi and Limoncocha; […]

167.
Moores Rowland issued its audit report on 14 July 2004, noting therein that the assignment of rights and obligations contemplated in the Farmout was made contingent on future events and that the assignment "might or might not happen" at the end of the four years during which the conditions were to be satisfied. The audit report recommended to the DNH that OEPC seek government authorization for the assignment during that year, assuming the assignment conditions were satisfied, and that the required ministerial approval be granted to OEPC in order to properly register the assignment.
168.
The evidence discloses that, by February 2004, AEC had made all payments due to OEPC under the Farmout. The day after Moores Rowland issued its audit report, on 15 July 2004, OEPC wrote to the new Minister of Energy and Mines, Mr. Eduardo López Robayo, "request[ing] the Ministry to approve the transfer by OEPC to AEC Ecuador of legal title to a 40% interest" in Block 15, as contemplated under the Farmout. In making this request, OEPC referred to its letter of 25 October 2000, as well as Minister Teran's response of 17 January 2001.
169.
The approval sought by OEPC was not granted. Rather, on 24 August 2004, as set forth in more detail later in this Award, the Attorney General of Ecuador ordered the Ministry of Mines and Energy to terminate the Participation Contract and the Unitized Fields Joint Operating Agreements through a declaration of caducidad.

I. The VAT Dispute

170.
In August 2001, Ecuador's tax authority, the SRI, contrary to its established practice of refunding value added taxes ("VAT") to oil companies, refused to grant such refunds in the future and, retroactively, claimed refunds of the taxes already paid. OEPC interpreted this decision to be a violation of Ecuadorian tax laws and the Treaty and, in November 2002, filed an international arbitration claim against Ecuador to recover the VAT refunds.
171.
On 1 July 2004, the VAT Tribunal issued a $75 million VAT Award in OEPC's favor, finding that Ecuador's conduct had been unfair and discriminatory. The VAT Award was sent to the parties on 12 July 2004, and was immediately made public.
172.
Ecuador challenged the award in the English courts. Its annulment application was rejected by the High Court on 2 March 2006 and that decision was confirmed by the Court of Appeal on 4 July 2007.

J. The Caducidad Proceedings and Related Events

173.
On 20 July 2004, Gerald Ellis and Fernando Albuja met with Minister López for the purpose of introducing Mr. Ellis as the new President and General Manager of OEPC. There is evidence in the record that, during this meeting, the Minister referred to the VAT Award as well as OEPC's alleged failure to comply with Ecuadorian laws and regulations.
174.
At around the same time, the Attorney General of Ecuador went to London to consult with Ecuador's attorneys with respect to a possible application before courts in London for the annulment of the VAT Award. In the course of an interview where the validity of the VAT Award was referred to, the Attorney General responded that "[w]e do not recognize it, and so much so that we will propose its nullity. Now, I am also studying the contract linking Occidental with the country. I want to check whether the contractual norms have been strictly complied with."
175.
Upon his return from London, in the course of a radio interview, the Attorney General stated:

In August 2004, once I came back from London, I went to the Energy Ministry and asked the Hydrocarbons Directorate to present me all the documentation that proved whether or not the Occidental Company was fulfilling the contract. Once the information was checked, after twelve hours of work, we concluded that this company had been in breach of contract.

176.
On 3 August 2004, following receipt of OEPC's request for approval of the transfer to AEC of legal title to a 40% interest in Block 15, Dr. Zurita, the DNH audits coordinator, submitted a memorandum to the National Director of Hydrocarbons. After reviewing the terms of the 25 October 2000 letter from OEPC and the 17 January 2001 reply from Minister Terán, Dr. Zurita concluded as follows:

According to the abovementioned, it is determined that Occidental exploration and Production Company on year 2000 carried out a transfer of the 40% of its rights and obligations in Block 15, including the Operational Agreements de Unified Exploitation of the Unified Fields Eden Yuturi and Limoncocha, in favor of City Investing Company, currently Alberta Energy Company based on a private agreement executed between the parties, which effective date was October 1, 2000, transfer that was carried out without authorization of the corresponding Ministry.

177.
A few weeks later, on 24 August 2004, the Attorney General wrote to the Minister of Energy and Mines, Mr. López, and requested that he terminate the Participation Contract. The Attorney General asserted that, in 2000:

[OEPC] transferred 40% interests and obligations from the Participation Contract for Exploration and Exploitation of Hydrocarbons in Block 15 in favor of [AEC], without having received the authorization of the Ministry of Energy and Mines, as provided by Article 79 of the Hydrocarbons Law and the same Participation Contract. (Emphasis in original)

178.
The Attorney General also alleged that OEPC had committed a number of technical infractions, which, he claimed, constituted a cause for termination under Articles 74.13 and 77 of the HCL. Finally, in that letter, the Attorney General stated that OEPC had not fulfilled its investment obligations with respect to Block 15, which, he claimed, constituted a cause for termination of the Participation Contract under Article 74.6 of the HCL.
179.
On the same day, the Attorney General sent a letter to the Executive President of PetroEcuador requesting that PetroEcuador follow the process set out in Clause 21.2 of the Participation Contract. The Tribunal recalls that Clause 21.2 provides that, in cases where there may be cause for forfeiture (i.e. caducidad) of the contract, PetroEcuador must serve OEPC with a notice of non-compliance and provide OEPC ten days to deny or accept the allegation. If OEPC admitted the allegation of non-compliance, it had thirty days to cure its breach.
180.
In a letter to the Executive President of PetroEcuador dated 8 September 2004, Minister López, acting upon the Attorney General's request of 24 August 2004, instructed PetroEcuador to initiate the termination procedure. The Minister's letter attached OEPC's request of 15 July 2004 for the transfer to AEC of 40% of the legal title to Block 15, the Farmout Agreement and the Joint Operating Agreement, as well as a report from the DNH listing various technical infractions committed by OEPC. Acting on Minister López's letter, on 15 September 2004, PetroEcuador notified OEPC of its alleged non-compliance with the Participation Contract. This notification gave OEPC ten business days to respond to the allegations. On 24 September 2004, OEPC sent a detailed 28-page letter to PetroEcuador denying the Attorney General's allegations.
181.
Nothing further happened until the first few months of 2005 when anti-American and anti-foreign investor groups of demonstrators protested in the streets of Quito, in particular in front of OEPC's offices. The demonstrators voiced their concern that OEPC's contract had not yet been terminated.
182.
In February 2005, Minister López and PetroEcuador Executive President Hugo Bonilla were called before the Ecuadorian Congress and questioned with respect to their perceived procrastination over the termination of OEPC's contract.
184.
The Attorney General emphasized that the termination process should already have been completed and warned that "the delay in the prosecution of the termination process constitutes a lamentable injury to the Ecuadorian State," and that "[t]here will not be dignitary, authority, functionary nor public servant exempt from responsibility for acts realized in carrying out his duties or for his omissions." The Attorney General also delivered the same message in a letter to the President of the Republic.
185.
The record discloses that, during March and April 2005, Occidental had meetings with PetroEcuador Executive President Bonilla, the President's Chief of Staff, Mr. Carlos Pólit, and the Minister of Labor, Mr. Raúl Izurieta, in an attempt to find a negotiated solution to the situation.
186.
In April 2005, after days of violent street protests in Quito, the Ecuadorian Congress ousted President Gutierrez from power. Minister López and Executive President Bonilla resigned. President Gutiérrez was replaced by then Vice President Alfredo Palacio.
187.
On 18 June 2005, during a major strike, a number of government officials, including the new Minister of Energy and Mines, Mr. Iván Rodríguez, signed resolutions making certain commitments to the Ecuadorian Orellana and Sucumbios provinces. The first of these resolutions stated: "The Minister of Energy and Mines and the President of PetroEcuador, as the competent authorities, commit to undertaking all of the necessary steps for the departure from Ecuador of the companies Occidental and EnCana AEC for having violated the juridical norms of the country."
188.
On 1 July 2005, the Attorney General issued a press release in which he stated that he would insist again that the Minister of Energy and Mines conclude the termination process and issue the "corresponding response". He also affirmed in the press release that the transfer to AEC on 1 November 2000 had been done "without authorization from the Ministry of Energy and Mines, as provided by Article 79 of the Hydrocarbons Law and the same Participation Contract."
189.
In addition, a report from a committee of PetroEcuador concluded that OEPC had not discharged its burden of proof with respect to its denial of the Attorney General's allegations and recommended that the process of caducidad be initiated immediately. The committee referred specifically to Articles 74, 75, 76 and 79 of the HCL as well as Clause 21.2.2 of the Participation Contract.
190.
On 2 August 2005, the new Executive President of PetroEcuador, Mr. Carlos Pareja, responded to the Attorney General's request and issued his recommendation to the Minister to declare termination of the Participation Contract. The Tribunal notes that Mr. Pareja resigned the day after issuing his recommendation to the Minister.

K. The Caducidad Decree

191.
In early November 2005, as the record discloses, Minister Rodríguez was facing several petitions for censure in Congress because of his failure to act on PetroEcuador's recommendation. On 10 November 2005, 27 members of Congress wrote to the President of the Congress calling for the impeachment of Minister Rodríguez if he failed to conclude the termination process.
192.
Minister Rodríguez was notified of this letter on 14 November 2005. The next day, November 15, the Minister officially notified OEPC of PetroEcuador's findings that there were causes for termination of the Participation Contract. He gave OEPC 60 business days either to cure the alleged violations or to disprove them.
193.
On 7 February 2006, OEPC responded to the Minister's notification in a 45-page letter to which were attached numerous documents. OEPC contended that there was no basis at all for termination of the Participation Contract. With this letter, OEPC submitted several requests to the Government of Ecuador for the production of certain documents.
194.
On 16 February 2006, PetroEcuador's Executive President Román resigned. Mr. Fernando González was appointed as his successor, the sixth Executive President of PetroEcuador since May 2004.
195.
On 10 March 2006, Minister Rodríguez commissioned two experts to examine and report on the documentary evidence submitted by the Attorney General, PetroEcuador, and OEPC. Minister Rodríguez also received a report on the legal effects of the Farmout from Andrew Derman who subsequently became the Claimants' oil and gas expert in the present proceeding. Mr. Derman concluded that the transfer of an economic interest was not an assignment under the laws of New York, the governing law of the Farmout.
196.
On 15 March 2006, President Palacio's press secretary stated that the administration feared a coup d'État as a result of strikes and demonstrations which had closed the highways in the north and center of the country. On 22 March 2006, the strike's leader issued a statement, promising that: "If caducity of the Occidental contract is declared, we will lift the strike."
197.
In late April 2006, Minister Rodriguez sent the Attorney General a letter asking him to confirm whether or not the law permitted a settlement with OEPC. On 2 May 2006, following a second request from the Minister, the Attorney General responded to the Minister's letter that the law did allow a settlement. He gave the same information to PetroEcuador. The Attorney General's opinion sparked a public outcry in the country.
198.
On 9 May 2006, the then candidate for President, Dr. Rafael Correa, led a demonstration outside OEPC's offices in which he and other demonstrators called for a symbolic "closure forever" of OEPC. The same day, various social organizations in Ecuador declared that they would demand the impeachment of both President Palacio for considering a settlement agreement with OEPC, and Attorney General Borja for opining that such an agreement was legally possible.
199.
On 15 May 2006, Minister Rodríguez issued the Caducidad Decree. The Decree terminated, with immediate effect, OEPC's Participation Contract and ordered OEPC to turn over to PetroEcuador all its assets relating to Block 15. The thirty-three page Decree included: (i) a summary of the termination process; (ii) block quotes from the letters of the Attorney General, PetroEcuador and OEPC; (iii) additional description of these letters and the positions articulated therein, as well as descriptions of other documents in the record; (iv) a description of norms considered; and (v) approximately four pages of reasoning. The Decree cited as a legal basis for caducidad Articles 74.11, 74.12 and 74.13 of the HCL.
200.
On 16 May 2006, State officials arrived at OEPC's offices in Quito and seized all of its property, including computers, files and other equipment, which were now said to be the property of the State. The next day, 17 May, other State officials, accompanied by the National Police, seized OEPC's oil fields in Block 15, including wells, drills, storage facilities and other oil exploration and production assets.

III. THE CLAIMANTS' CLAIMS

A. The Claimants' Position

1. Overview of the Claimants' Position

201.
The Claimants' principal contention in this arbitration is that the termination of the Participation Contract was made without legitimate cause, i.e. in the absence of legal grounds for termination under both the Participation Contract itself (otherwise referred to by the Claimants as a "Termination Event") and Ecuadorian law (namely the Hydrocarbons Law). The Caducidad Decree was not, according to the Claimants, a "good-faith response to a breach of Ecuador's contractual interests." Pointing to the Respondent's alleged "after-the-fact shifts in position", the Claimants assert that "[t]he evidence demonstrates that the Termination Decree was the product of a desire to find an excuse for the predetermined conclusion to expel OEPC from Ecuador, which was inspired by a desire for revenge for OEPC's success in the prior BIT arbitration of the VAT dispute and by the demands of political rivals and organized pressure groups."
202.
The Claimants contend that, due to its political significance, the caducidad administrative proceedings were tainted from start to finish by a complete lack of due process. In particular, the Claimants submit that the caducidad proceedings failed to yield a result based on evidence or law, that the Ecuadorian authorities prejudged OEPC's alleged wrongdoing before the caducidad proceedings even began and that OEPC was not given any meaningful opportunity to develop testimony during the proceedings at issue.
203.
Furthermore, the Claimants argue that it matters little whether an actual "Termination Event" in fact occurred in the circumstances because "both international and Ecuadorian law proscribe the unilateral termination of a government contract where, as here, the alleged breach was always known and never objected to by the State, and such termination was manifestly unfair, arbitrary, discriminatory and disproportionate."
204.
The Claimants accordingly present their case on liability on the basis of the two following main arguments.
205.
First, the Claimants maintain that by terminating the Participation Contract without cause (i.e. in the absence of a Termination Event), the Respondent has breached its obligations under both the Participation Contract and the Treaty. In advancing this argument, the Claimants essentially allege that (i) the Farmout Agreement did not operate an assignment of contractual rights and obligations in violation of Article 74.11 of the HCL, and (ii) the Farmout Agreement and the Joint Operating Agreement did not create a consortium in violation of Article 74.12 of the HCL.
206.
Second, assuming a Termination Event is found to have occurred, the Claimants contend that the Caducidad Decree would still be in breach of the Respondent's obligations under the Treaty and Ecuadorian law because it was unfair, arbitrary, discriminatory and disproportionate.7
207.
Each of the Claimants' two main arguments on liability will now be developed in more detail.

2. The Claimants' First Main Argument: Breach Due to Absence of Termination Event

208.
As noted above, the Claimants argue that by terminating the Participation Contract without legitimate cause, the Respondent breached its obligations under the Treaty and international law. According to the Claimants, "[t]he Treaty proscribes (i) any failure to comply by the State with any contractual obligation into which it has entered with regard to an investment; and (ii) the unjustified repudiation by the State of any contract into which it has entered with an investor." (Emphasis in original)
209.
On this basis, the Claimants contend that the Respondent breached its duties under Article II.3(c) of the Treaty which requires Ecuador "to observe any obligation it may have entered into with regard to investments", as well as its duties under Article II.3(a) prohibiting unfair treatment, Article II.3(b) prohibiting arbitrary impairment, and Article III prohibiting expropriation.
210.
In making their first main argument, the Claimants submit that the Respondent has failed to demonstrate the occurrence of "Termination Events" under the HCL:

Ecuador claims that it was entitled under Article 74 of the HCL to terminate for cause. However, the Termination Decree provides remarkably little by way of explanation or argument and nothing by way of proof for that claim. Neither did the papers of the Attorney General and Petroecuador from which the Minister copied and pasted in his Termination Decree. This manifest lack of proof and reasoning reflected Ecuador's lack of evidence and arguments. As Claimants will show below, none of the alleged Termination Events has in fact occurred. For that failure alone, the Termination Decree was wrongful as a matter of both Ecuadorian and international law.

211.
Recalling that the Caducidad Decree and the proceedings that preceded it were based principally on the Respondent's view that the transfer of an economic interest to AEC pursuant to the Farmout Agreements purportedly constituted an assignment of rights and obligations in violation of Article 74.11 of the HCL, and that OEPC purportedly committed various technical violations of Ecuadorian hydrocarbons legislation contrary to Article 74.13 of the HCL, the Claimants deny that the Participation Contract can be properly terminated on such grounds.
212.
The Claimants also deny what they refer to as the Respondent's "new grounds" for termination, namely that the Farmout arrangement allegedly created a "consortium" in violation of Article 74.12 of the HCL and that, in parallel, diplomatic pressures were made against the Respondent in violation of Clause 22.2.1 of the Participation Contract.

(a) Alleged Violations of Articles 74.11 and 74.12 of the HCL

213.

The Tribunal observes from the outset that although the Claimants' wrongful termination submissions (as well as those of the Respondent) regarding Articles 74.11 and 74.12 of the HCL significantly overlap, they predominantly address the former (unauthorized transfer or assignment) rather than the latter (unauthorized consortium). Thus, by reference to the two-stage transaction envisaged by the Farmout, the Claimants reject the Respondent's allegation that the Farmout violated the HCL because it was tantamount to a wrongful assignment or transfer:

In the first stage, OEPC transferred a 40% economic interest in Block 15 to AEC, in exchange for certain capital contributions by AEC. AEC's economic interest consisted essentially of 40% of OEPC's share in the crude produced from Block 15. AEC's capital contribution required payments from AEC to OEPC over the course of four years and was known in the industry as the "earning obligation."

Article 2.01 of the Farmout, which described this phase, specifically stated that the Farmout of the economic interest:

does not include nominal legal title to an interest in Block 15 or an interest as a party to the Participating Agreements. OEPC shall continue to own 100% of the legal title to the Participating Agreements and to the interest in Block 15 granted or provided for in the Participating Agreements. CE-9 (OC00347). (Emphasis added)

Thus, the operative provision of the Farmout directly contradicts Ecuador's claim that an assignment or transfer occurred.

The second stage, which never came to pass, contemplated a future assignment by OEPC of legal title to the 40% economic interest. As described in Article 4.01, that assignment was subject to: (i) AEC's meeting its earning obligation; and (ii) OEPC's obtaining prior government approval:

[A]fter AEC has made all payments... OEPC and AEC shall execute and deliver such documents as are required to convey legal title to AEC in and to a 40% economic interest in the Participating Agreements and Block 15 and to make AEC a party to the Participating Agreements as owner of such 40% economic interest (subject to obtaining required governmental approvals). CE-9 (OC00353). (Emphasis added)

When AEC met its earning obligation in July 2004, OEPC proceeded to request government approval for the transfer of legal title to AEC. It sent a letter to this effect to the then-Minister of Energy and Mines, Eduardo López Robayo on July 15, 2004. The government never responded to the request, and OEPC therefore did not proceed with the transfer. (Emphasis in original)

214.
The Claimants further emphasize that the Farmout Agreement is governed by the laws of New York, under which the transfer of an economic interest, they argue, does not effectuate an assignment:

Under New York law, as presented in the opinion submitted by Andrew Derman, the expert appointed by the Minister of Energy and Mines, an assignment does not exist unless "the assignor's right to performance by the obligor is extinguished in whole or in part and the assignee acquires a right to such performance." CA-236, Restatement Second ¶317; CA-235, American Jurisprudence ¶1; CA-237, Williston ¶74:1. Put otherwise, an assignment requires that "an assignee step[] into the assignor's shoes and acquire[] whatever rights the latter had." CA-234, Furlong ¶ 382. Under New York law, a mere promise to assign rights and obligations in the future subject to conditions precedent is not an assignment. CA-236, Restatement Second ¶330; CE-127. (OC02737; OC02741)

It is plain that as a matter of New York law, the transfer of a 40% economic interest did not effectuate an assignment. The mere transfer of an economic interest did not in any way create privity under the Participation Contract between Ecuador and Petroecuador, on the one hand, and AEC, on the other. That transfer of economic interest did not create any rights of AEC against Ecuador or Petroecuador; nor did it create any obligations for AEC to them.

215.
Regarding Ecuadorian law on assignment, the Claimants add:

Thus, under Ecuadorian law, for the transfer of economic interest under the Farmout to constitute an assignment, it should have resulted in AEC exercising rights and assuming obligations under the Participation Contract vis-à-vis Ecuador and Petroecuador, and OEPC ceasing to exercise such rights and to perform such obligations. HPL ER ¶49. Additionally, under Ecuadorian law, the assignment of a contract or personal rights occurs only when the assignor turns over to the assignee a deed that describes the rights being assigned. HPL ER V ¶¶18-27. In other words, there is no assignment without the physical transfer from assignor to assignee of such deed. HPL ER V ¶21. As explained below, neither of these conditions for an assignment has been met.

216.
Based on the above, the Claimants aver that until legal title was transferred, only OEPC remained liable vis-à-vis the Respondent and PetroEcuador for the performance of the Participation Contract and, furthermore, that only OEPC could enforce its rights under the Participation Contract. In other words, according to the Claimants, an assignment or transfer of contractual rights required privity between AEC and the Respondent and the transfer of a 40% economic interest did not create such privity. Along the same lines, the Claimants also argue that a mere promise to assign rights and obligations in the future subject to conditions precedent is not an assignment, and that a contractual agreement to reimburse for taxes or other costs does not create an assignment either.
217.
Regarding the Respondent's allegation that OEPC deliberately concealed the Farmout Agreement, the Claimants answer that OEPC had neither the motive nor the opportunity to do so. They further submit that OEPC fully knew that authorization by the Respondent of the agreements at issue would ultimately be necessary:

In the Counter-Memorial on Liability, Ecuador surmises without support that "OEPC presumably hoped that the true nature of the [Farmout Agreement and the Operating Agreement] would never be known to Ecuador...." In fact, the evidence proves that at all times prior to the eventual transfer of legal title, OEPC recognized that authorization by Ecuador and full disclosure of all agreements would occur. The agreement itself required full disclosure and governmental consent. OEPC not only disclosed its relationship with AEC to Ecuador in a series of meetings in 2000, but it would have provided copies of the underlying agreements in 2000 if the Minister of Energy and Mines had advised that approval was necessary at that stage - or if the Minister had simply requested them.

218.
This brings the Claimants to the underlying premise of their case, i.e. that the Claimants did not ask for approval in 2000 because all OEPC was transferring at the time was an economic interest, not a legal one. Arguing that it would have been "irrational" for OEPC and AEC to conceal the nature of the Farmout, the Claimants contend that the Respondent's "concealment theory" requires, at a minimum, the following findings on the part of the Tribunal:

• The agreements constituted a transfer of rights and obligations under the Participation Contract.

• OEPC and AEC believed that the nature of the Farmout Agreement and the Joint Operating Agreement constituted such a transfer that required immediate government approval.

• Nevertheless, in order to obtain certain short-term benefits, OEPC and AEC chose to risk their substantial investments and their longterm profits in Block 15 by concealing the "true nature" of the Farmout Agreement and the Joint Operating Agreement.

219.
The Claimants maintain that "Minister Terán, the Director of the DNH, and other Ecuadorian government officials confirmed OEPC's and AEC's belief that no government approval was necessary for the first stage of the transaction, the transfer of a 40% economic interest." They further submit that OEPC had no reason to doubt that it would have received approval for either stage of its transaction with AEC, based inter alia on its "excellent relations with Ecuador in the fall of 2000." The Claimants also emphasize that OEPC never had any financial incentive to hide its relationship with AEC.
220.
In addition, the Claimants argue that the Respondent's "concealment theory" flies in the face of the parties' dealings at the relevant time, i.e. in late 2000. They contend that the Respondent was informed of the Farmout at all relevant levels of government and refer, in particular, to the 24 October 2000 meeting with Minister Terán, the November 2000 meetings with PetroEcuador, the 14 December 2000 meeting with the Director of the DNH and the further communications with Minister Terán in January 2001.
221.
Regarding Minister Terán's testimony in particular, the Claimants state:

Minister Terán complains that OEPC and AEC never informed him of the details of the Operating Agreement, but concedes that OEPC did inform him that a transfer of legal title was subject to a future negotiation. Ecuador apparently hopes that the Tribunal will read these two statements by Minister Terán together to imply that no discussion of either AEC's proposed involvement in Block 15 or of the agreement between AEC and OEPC ever occurred, although Minister Terán does not actually say as much. Contrary to what Ecuador seeks to imply, OEPC and AEC informed Minister Terán that AEC would be offering its expertise to OEPC, and that OEPC and AEC were in the midst of closing the deal to transfer an economic interest in Block 15. It is not plausible that OEPC and AEC would schedule a meeting with Minister Terán in 2000 only to limit the conversation, for all intents and purposes, to a hypothetical transfer of legal title tentatively planned for 2004. In fact, OEPC informed Minister Terán of the immediate transfer of economic interest and everything that the transfer entailed.

222.
The Claimants further add:

Ecuador concedes that OEPC communicated on several different occasions that AEC had acquired an economic interest in Block 15. Ecuador seeks to diminish these presentations by arguing that OEPC's description of the Farmout Agreement as a transfer of economic interest was insufficient. However, as Claimants have shown, that description was entirely accurate for the earn-in period of the transaction. In light of considerable effort spent by OEPC to inform Ecuador of the transfer of economic interest and its public disclosure of the transaction, it is implausible to suppose that OEPC's efforts were part of a campaign actually to withhold information. OEPC had no reason to conceal any aspect of its relationship with AEC, but instead chose to communicate repeatedly that AEC was acquiring an economic interest in Block 15.

223.

As for the Respondent's allegation that it inadvertently discovered the true nature of the Farmout Agreements as a result of the 2003/2004 Moores Rowland audit, the Claimants refute this suggestion in the following words:

DNH was continuously involved in exchanges or discussions about the Farmout and Operating Agreements, between February and early May 2004. Not once during that period - or thereafter until the VAT Award was issued - did the DNH suggest that it learned anything from Moores Rowland about the Farmout that it did not already know. Not once did the DNH suggest that OEPC would face caducidad because of the Farmout. On the contrary, on May 10, 2004, having discussed the matter with Moores Rowland and OEPC, the DNH specifically subscribed to the conclusion that it would be "prudent" for OEPC to "define and expedite the process of assignment of obligations and rights to AEC," so that the Ministry of Energy and Mines could authorize the transfer of legal title and "thereby avoid any observation by the regulatory authorities." Thus, it is not at all surprising that, as noted above, Ecuador never alleged concealment through the caducidad proceedings or in the Termination Decree.

224.
In addition to rebutting the Respondent's "concealment theory," the Claimants also reject the Respondent's claim that the Caducidad Decree was a bona fide implementation of a legitimate regulatory policy. In this regard, the Claimants submit that the policy concerns raised by the Respondent are in fact reflected in Clause 16.2 of the Participation Contract, which states:

The prohibition to transfer or assign rights [...] is not an obstacle to freely trade Contractor's stock, without need of said authorization, provided that the trading of said stock does not change, modify or extinguish the legal existence of the Contractor, nor constitute a decrease in its administrative, financial and technical capacities.

225.
The Claimants submit that, pursuant to that provision, "OPC could have sold its entire 100% share of OEPC to AEC. As long as OEPC maintained ‘its administrative, financial and technical capacities,' the transaction would not have violated the HCL's underlying policy or warranted any sanction."
226.
The Claimants maintain that the Agreements with AEC did not reduce OEPC's ability to execute the Participation Contract and that even if AEC had operated Block 15 (which they deny), the Respondent does not dispute that it had already fully vetted and was prepared to approve AEC as an operator of Block 15. They also argue that Minister Terán admitted that a financial relationship between OEPC and AEC was beneficial to the Respondent. The Claimants accordingly conclude that the Farmout caused no harm to the Respondent but provided, rather, significant benefit.
227.
In terms of AEC's rights under the Farmout Agreement and Joint Operating Agreement, the Claimants deny the allegation of "operational control" put forward by the Respondent as follows:

Ecuador's case that an assignment occurred within the meaning of Article 74.11 rests on the assertion that "it is enough if the contractor agrees to share [participation contract] rights with a third party, or otherwise gives the third party the ability to influence the contractor's performance of the contract." Its case that a consortium was formed within the meaning of Article 74.12 similarly rests on the assertion that OEPC and AEC "enter[ed] into a binding agreement in which they commit[ted] themselves to work together for exploration or production operations."

Both assertions are factually wrong. Under the terms of the Operating Agreement, AEC could not direct either the day to day management or long term development strategy of Block 15; and AEC never did direct either the day to day management or long term development strategy of Block 15. (Emphasis in original)

228.
Specifically, the Claimants refute the Respondent's argument that the funding and voting provisions of the Joint Operating Agreement conferred upon AEC any control over Block 15 operations. These provisions, according to the Claimants, only allowed AEC to make financial decisions, not operational ones. The Claimants submit:

It was envisaged under the Operating Agreement that OEPC and AEC would jointly fund operations in Block 15 as "joint operations," and its voting procedures gave both parties a vote on whether any particular proposed joint operation should receive such funding. Clause 5.13. Ecuador cites these voting procedures to claim that "all significant operational decisions. required AEC's approval." That is simply not true. The only right that AEC had under these voting provisions was the right to refuse to fund a certain operation by not approving certain items of a work plan and budget - not a right to preclude OEPC from carrying out the operation altogether.

[…]

Even with full access to the voluminous files OEPC left in Ecuador, the only evidence Ecuador can produce to support this claim are a few documents showing nothing more than AEC's frustration at its lack of involvement in Block 15 operations and a few letters recommending or "approving" specific operational issues. As explained above, AEC's "approval" only affected the financing of operations, not the operations themselves. Ecuador has failed to offer any evidence demonstrating that AEC possessed any control over the operations at Block 15. Indeed, the frustration shown in the few letters cited by Ecuador proves the absence of control by AEC rather than any ability in fact to control these operations.

[…]

OEPC alone established the key strategic Development Plans and the Work Plans and Budget, and OEPC alone retained final decision-making authority over day to day operations. AEC provided views and advice on specific operations based on its independent assessment and its experience operating other blocks. AEC never withdrew funding and knew it could not sole-risk OEPC. As evidenced by AEC's complaints about its lack of involvement in Block 15 operations, OEPC never hesitated to exercise its final decision-making authority. AEC was a watchful investor, but it never exercised rights or assumed obligations under the Participation Contract, nor did it cause OEPC to depart from its operational plans and objectives. (Emphasis in original)

229.
In the words of the Claimants, "OEPC was always prepared to listen to AEC's opinions but was ultimately sovereign when making operational decisions." It is the Claimants' position that AEC neither acquired in theory nor exercised in practice any rights under the Farmout Agreement or the Joint Operating Agreement to direct either the day-to-day management or long-term development strategy of Block 15. In this regard, they add that "taking free advice from time to time does not equate with granting operational control rights."
230.
Finally, the Claimants deny that AEC and OEPC in any way agreed to form a consortium or association. This charge, according to the Claimants, is in fact a "new" ground invoked by the Respondent to justify the Caducidad Decree. The Claimants refute this allegation in the following words:

[N]o Article 74.12 Termination Event has occurred because (i) a consortium must have separate legal personality and AEC and OEPC did not create any entity with separate legal personality; and (ii) even if no separate legal personality were required, members of a consortium must undertake joint and several liability; OEPC remained at all times the only party to the Participation Contract with Petroecuador and Ecuador, and because AEC never assumed any liability under the Participation Contract, OEPC never undertook joint and several liability with AEC vis-à-vis Petroecuador and Ecuador. In any event, general principles of Ecuadorian and international law preclude punishment on the basis of concepts as ill-defined as "consortium" is under Ecuadorian law.

231.
The Claimants thus object to the Respondent's definition of a "consortium," and conclude as follows:

Unable to show that OEPC and AEC formed a consortium, Ecuador attempts to employ untenably broad definitions and argues that a consortium within the meaning of Article 74.12 is created whenever parties "enter into a binding agreement in which they commit themselves to work together for exploration or production operations."

As shown above, this nebulous definition is baseless; but the Farmout and the Operating Agreement do not meet even Ecuador's untenably broad definition. As shown above, AEC neither acquired nor exercised any rights under the Farmout Agreement or the Operating Agreement to direct either the day to day management or long term development strategy of Block 15. Therefore, even under Ecuador's erroneous definition, OEPC and AEC did not form a consortium.

(b) Alleged Violations of Hydrocarbons Regulations

232.
Regarding the Respondent's allegations of technical infractions, the Claimants characterize them as baseless, trivial and inconsequential. They write:

The 62 alleged technical infractions referenced by the Termination Decree's [ sic ] occurred over a period of five years, 2001-2006, and can be grouped as follows: (i) 12 claims of drilling of individual wells either without prior authorization or without proper notification; (ii) 14 claims of production from individual wells above, or without, the authorized rates; (iii) 22 claims of reporting violations, such as late filing of final drilling reports; and (iv) 11 claims of miscellaneous violations. Due to the lack of substantiating documents in the administrative file for almost half of the 62 alleged infractions, Claimants have been unable to determine in any way the nature of three of these infractions.

233.
The Claimants further refute the Respondent's charge in this regard by arguing that "no Article 74.13 Termination Event has occurred because Ecuador has failed to (i) document nearly half of the technical infractions on which it purported to base the Termination Decree; and (ii) disprove that the documented infraction allegations were misapplications of the HCL regulation, took place in the unitized fields with PetroEcuador's knowledge and approval, and/or were of a clerical or otherwise inconsequential nature."
234.
In addition, the Claimants aver that "the only alleged infractions Ecuador spends any effort attempting to describe as serious and substantive are those alleging that OEPC overproduced from certain individual wells," i.e. 4 of the 62 alleged infractions. They further emphasize that OEPC, like other oil companies operating in Ecuador, paid its overproductions fines (at most $3,000 each). Finally, they expressly refer to an opinion on the part of PetroEcuador regarding Petrobras to the effect that technical infractions for which a fine has already been paid cannot give rise to caducidad.

(c) Alleged Diplomatic Pressures

235.
The Claimants address the Respondent's allegation that they sought the assistance of the U.S. Government in violation of the Participation Contract by noting from the outset that this consists of another entirely "new" ground put forward by the Respondent and raised for the first time in this arbitration. More particularly, the Claimants submit as follows:

Ecuador's new theory should be dismissed because (i) under international law the Tribunal should assess the lawfulness of Ecuador's conduct solely on the basis of the reasons stated in the Termination Decree; (ii) Clause 22.2.1 is unenforceable as a matter of international law; (iii) Ecuador is estopped from invoking Clause 22.2.1 because it had knowledge of the relevant facts long before it began its caducidad proceedings in 2002; and (iv) Ecuador failed to prove that Occidental engaged in any proscribed conduct after the caducity proceedings began (and indeed after 2002). To the contrary, once Ecuador began those proceedings in 2004, OEPC consistently informed the U.S. Government that it did not seek diplomatic assistance.

236.
The Claimants thus maintain that the Respondent was well aware of OEPC's frequent contact with the U.S. Government about the VAT dispute from 2001-2002, but that OEPC did not seek any assistance from the U.S. Government after 2002, i.e. in connection with the caducidad dispute.

3. The Claimants' Second Main Argument: Breach Notwithstanding Termination Event

237.
As an alternative argument, the Claimants contend that even if a Termination Event is found to have occurred in the circumstances, the termination of the Participation Contract was unlawful under both the Treaty and Ecuadorian law on the grounds that it was grossly unfair, arbitrary, discriminatory and disproportionate. In the words of the Claimants:

Both the Treaty and Ecuadorian law guaranteed Claimants and their investments fair, non-arbitrary, and non-discriminatory treatment. In passing the Termination Decree, Ecuador blatantly disregarded these standards. Having openly premeditated the termination, Ecuador imposed manifestly disproportionate punishment on Claimants on grounds that it never substantiated in the face of OEPC's vigorous defenses and that were not found sufficient to warrant contract termination in the case of other oil companies.

238.
The discretionary nature of the ministerial decision which led to the Termination Decree is central to the Claimants' second main argument. Citing Article 79 of the HCL regarding nullity of an unauthorized transfer or assignment, the Claimants contend that "the nullity of the transfer itself, such as the Farmout Agreement if it were illegal, is mandatory; but the possibility of terminating the underlying contract, the Participation Contract, is entirely discretionary." On this basis, the Claimants submit that the Minister exercised his discretion in a manner inconsistent with the Treaty and Ecuadorian law for the following reasons:

(i) the Termination Decree was manifestly disproportionate;

(ii) the Termination Decree frustrated the Claimants' legitimate expectations;

(iii) the Termination Decree was unfair and arbitrary;

(iv) the Termination Decree was discriminatory;

(v) the Termination Decree denied the Claimants' full protection and security;

(vi) the Termination Decree expropriated the Claimants' investments without compensation; and

(vii) the Respondent allowed PetroEcuador and Petroproducción to aid and abet the Termination Decree.

239.
In connection with their submission that the termination of the Participation Contract was grossly unfair, arbitrary, discriminatory and disproportionate, the Claimants reiterate their contention that the Respondent terminated the Participation Contract for reasons of political expediency, rather than on the basis of evidence or law. The Claimants also emphasize that the Respondent has not terminated the contracts of other oil and gas operators in Ecuador (namely, Tripetrol and Petrobras), even though these operators have assigned rights and obligations subject to government approval, and others (such as Petrobell, Perenco, Tecpecuador and Canada Grande) have allegedly committed as many or more technical infractions as OEPC in relation to production.
240.
In addition, the Claimants rely on the prohibition against disproportionate measures under the Treaty and do not accept the Respondent's contention that any and all Article 74 violations justify termination of the Participation Contract:

Accepting Ecuador's simplistic proposition, for which it cites no authority, that imposing "the very sanction that the law calls for in a specified context" is per se proportionate would deny the very essence of the proportionality principle. A finding that prohibited conduct has occurred is not enough to justify the administration in imposing the harshest of sanctions in the administrative arsenal. The administration must also carefully examine the particular circumstances of the alleged prohibited conduct, including the consequences flowing from it. As the cases cited above show, the Minister had to find that the contract was no longer viable, or at least that serious damage had occurred, as well as determining that the underlying policy of the contractual norm had been violated, before it could terminate OEPC's contract. No such finding was made here, and as shown above, none could have been made. (Emphasis in original)

241.
Referring to the circumstances in which the Caducidad Decree was issued, the Claimants allege that it bore no relation to the requirements of general interest, and reiterate that the Respondent had already vetted AEC and was prepared to approve it as a participant in Block 15. In this regard, the Claimants add that neither the Farmout nor the alleged technical infractions rendered continued performance of the Participation Contract impossible or caused any damage to the Respondent.
242.
In terms of their legitimate expectations, the Claimants refute the Respondent's suggestion that they were not entitled to place reliance on the government's alleged acquiescence of the Farmout. In particular, they take issue with the Respondent's interpretation of the Temple of Preah Vihear case on estoppel by conduct. They write:

[…] Contrary to Ecuador's assertion, however, this standard is nowhere found in the text of Temple of Preah Vihear, nor is it a settled rule of international law. On the contrary, the doctrine of estoppel in international law has traditionally included two elements: (i) clear, voluntary and authorized statements or conduct from a party and (ii) reliance by the other party triggering either detriment to the relying party or advantage to the party making the statement or engaging in conduct. ("What appears to be the common denominator of the various aspects of estoppel which have been discussed, is the requirement that a State ought to maintain towards a given factual or legal situation an attitude consistent with that which it was known to have adopted with regard to the same circumstances on previous occasions.") (emphasis added); ("Estoppel operates on the assumption that one party has been induced to act in reliance on the assurances or other conduct of another party in such a way that it would be prejudiced were the other party later to change its position."). (Emphasis in original)

243.
Finally, the Claimants maintain that the Respondent's "one-size-fits-all" argument that OEPC should have exhausted local remedies was specious as a jurisdictional theory and remains so in its "reincarnation" as a merits theory, because the Treaty itself required the Claimants to make an irrevocable choice between pursuing remedies before the Ecuadorian courts or this Tribunal.

B. The Respondent's Position

1. Overview of the Respondent's Position

244.

At the outset of its pleadings, the Respondent characterizes the Claimants' case, to the extent that it is based on an alleged "purely innocuous arrangement that the Government had known about all along," as pure fiction. The Respondent summarizes its own view of the facts of the case as follows:

OEPC's transaction with AEC was not of the innocuous nature the Claimants suggest, did require the approval of the Ministry of Energy and Mines (the "Ministry"), and was not properly disclosed to Ecuador. In fact, the Claimants repeatedly represented to the Government that the "first phase" of the transaction involved only the transfer of what it called a passive "economic interest" having no effect on any aspect of the Participation Contract. That was false. Far from assigning a mere "economic interest," the so-called "Farmout Agreement" transferred to AEC a "‘working interest' or ‘participation interest'" in Block 15. As a result, OEPC was obliged, from the outset of the relationship, "to act with regard to the Farmout Interest of [AEC] as [AEC] shall direct from time to time as if [AEC] were a party to the Participation Agreement owning legal title to a 40% interest in the Participation Agreements. " This fundamental aspect of the OEPC/AEC arrangement was never disclosed to Ecuador.

On the same day they signed the Farmout Agreement, OEPC and AEC also executed an undisclosed "Joint Operating Agreement." Under that agreement, AEC was given the right to appoint a representative to the Block 15 Management Committee that "supervised and directed" the Block 15 operations. It also had the power to veto the most important decisions relating to Block 15's operations, such as the adoption of its development plan, work program, and budget. Moreover, AEC could, at its election, conduct "exclusive operations" in Block 15 without the participation or approval of OEPC. In sum, OEPC was required to obtain AEC's approval for all major operating actions, including, but not limited to:

• submitting development plans;

• submitting work programs or budgets;

• making financial decisions;

• designating oil discoveries as commercial;

• amending or extending the Participation Contract; and

• assigning, selling, licensing or transferring any Participation Contract rights.

It is undisputed that OEPC failed to disclose the foregoing terms to Ecuador. And in its numerous meetings with the Government in 2000 and 2001, OEPC never provided the Government with copies of the Farmout Agreement or the Joint Operating Agreement. To the contrary, OEPC misrepresented to the Government that it was still in negotiations with AEC over any possible future transfer of rights. In reality, the Farmout Agreement and Joint Operating Agreement had been executed on October 19, 2000 - five days before OEPC's first meeting with the Government on the matter.

Once these simple facts are understood, the real story emerges. As told by Pablo Terán, then-Minister of Energy and Mines, in his witness statement, the Government was never told of a "farmout" or that there had been (or would be in the immediate future) an effective transfer of meaningful rights and obligations under and in relation to the Participation Contract. Moreover, Minister Terán made clear to OEPC that approval would be necessary if and when OEPC and AEC reached an agreement on the transfer of rights and obligations concerning the Participation Contract.

Thus, Minister Terán sent a letter to OEPC dated January 17, 2001, stating that he would wait until OEPC and AEC had reached an agreement on the transfer of rights and obligations under the Participation Contract and would expect OEPC to seek prior approval at that time. He also warned that such a transfer without authorization "would give rise to the contract's caducidad. " Unbeknownst to the Government, the transfer agreements between OEPC and AEC had already been executed three months earlier. (Emphasis in original)

245.
The Respondent refutes the Claimants' interpretation of the Farmout Agreement and the Joint Operating Agreement in the following words:

[T]he Claimants contended that anything short of a formal conveyance of a legal interest was permissible without consent. That position is artificial, disingenuous, and unsustainable under both Ecuadorian law and common sense. The Farmout Agreement and the Joint Operating Agreement created immediately-effective rights for AEC to exert influence over the Participation Contract area. They also created a means by which premiums arising from Block 15 interests could be earned by others to the exclusion of Ecuador. Both are objectionable unless fully informed consent is given in advance.

246.

In addition, the Respondent takes issue with the Claimants' alleged attempt to circumvent the language of the agreements at issue:

Thus, the Claimants' case has now been reduced to an argument that, although the actual language of the Farmout Documents provided for AEC to receive operational and managerial rights in Block 15 in 2000, OEPC and AEC had some unwritten "understanding" that these rights could not be exercised until the "second phase" of their transaction. The Claimants do not - and cannot - point to a single contemporaneous document that reflects this understanding.

More fundamentally, this argument is flatly contradicted by two undeniable facts. First, the argument is contradicted by what the Farmout Documents actually say. Those agreements make unmistakably clear that operational rights vested immediately. Indeed, the precise timing of the transfer of these operational rights is clearly set forth by the Farmout Agreement itself:

The Farmout Interest is to be transferred to AECI as of the Effective Time includes a "working interest" or "participation interest" in the Participation Agreements and Block 15 except that it does not include nominal legal title to an interest in Block 15..

[…]

Second, the Claimants' argument that the operational rights assigned to AEC were "illusory" is disproved by how the parties acted. As discussed in Paragraphs 43 to 47 of Ecuador's Counter-Memorial, AEC frequently exercised its operational rights with respect to Block 15. These rights were hardly "illusory," and AEC's conduct conclusively shows that it did not believe they were. (Emphasis in original)

247.
In terms of its overall position in this arbitration, the Respondent contends that OEPC acted in bad faith vis-à-vis Ecuadorian officials by not disclosing the true nature of its contractual relationship with AEC. In particular, the Respondent refers to the circumstances in which the Farmout Agreements were inadvertently "discovered" by Moores Rowland in 2003/2004, alleging that OEPC in fact then resisted disclosure of the agreements.
248.
More substantively, the Respondent maintains that OEPC's conduct constituted valid grounds for termination of the Participation Contract pursuant to Articles 74.11 and 74.12 of the HCL, i.e. where the contractor, it is recalled, "transfers rights or enters into a private contract for the assignment of one or more of its rights" or "forms consortiums or associations for the exploration or production operations, or withdraws from them," without authorization from the Ministry. As argued by the Respondent, "[i]t follows necessarily that the issuance of the Caducidad Decree could not have been a breach of the Participation Contract, because the Participation Contract is governed by Ecuadorian law." The Respondent adds:

[T]he issuance of the Caducidad Decree was explicitly contemplated in the Participation Contract. As previously noted, the Participation Contract provides at Clause 21.1.1 that the Contract shall terminate by caducidad if OEPC commits any of the causes specified in Article 74 of the Hydrocarbons Law. Accordingly, although the issuance of the Decree was not itself a contractual act, the Contract clearly put OEPC on notice that it would be terminated under the precise circumstances that ultimately arose, and OEPC accepted this when it signed the Contract. The Caducidad Decree thus could in no event be considered a breach of contract. Indeed, it is hard to imagine any legal regime that would consider it to be a breach of contract for a party to a contract to take an action to which its counterparty has explicitly consented, in response to that counterparty's own violations of the law and breaches of contract. (Emphasis in original)

249.
As for the Respondent's defense to the Claimants' allegation that the Caducidad Decree was issued in violation of both the Treaty and international law (i.e. the Claimants' second main argument of breach notwithstanding a Termination Event), it argues that "the relevant aspects of Ecuadorian law comported fully with international standards and were applied by the Minister in an even-handed and rational manner. Under these circumstances, Ecuador cannot be deemed to have violated any of its obligations under the Treaty or international law in connection with the Claimants' investment." The Respondent accordingly considers the Claimants' "attempts to cast doubt on the thoroughness and integrity of the two-year caducidad investigation" as entirely unfounded and irrelevant.
250.
The Respondent's defenses to the Claimants' two main submissions will now be reviewed in more detail.

2. The Respondent's Defense to the Claimants' First Main Argument: The Caducidad Decree Complied Fully with Ecuadorian Law

251.
The Respondent states that the Caducidad Decree complied fully with Ecuadorian law because OEPC's conduct constituted valid grounds for termination of the Participation Contract, an agreement governed by the laws of Ecuador. The Respondent describes the causes for caducidad under Articles 74.11 and 74.12 of the HCL as encompassing situations where "a third party has acquired control or influence over operational activities in the relevant fields, without the Ministry having been afforded the opportunity to assess the suitability of that third party for this role, or even to monitor the identity of the entities investing in the hydrocarbon sector in Ecuador." The requirement for authorization in such situations (and, conversely, the prohibition against unauthorized transactions) is, according to the Respondent, based on sound policy reasons.
252.
As part of its argument to the effect that the Caducidad Decree complied fully with Ecuadorian law, the Respondent further submits that (i) the sanction of caducidad was per se appropriate and proportionate in this case; (ii) the Ministry was not precluded from declaring caducidad by the doctrines of actos propios, confianza legítima, buena fe, or any other doctrine recognized by Ecuadorian law; (iii) the Respondent observed OEPC's due process rights during the caducidad investigation, and afforded OEPC a full opportunity for challenging the Decree; and (iv) the requirement that OEPC turn over all of its equipment and installations upon declaration of caducidad was agreed to by OEPC, and was in no way unconstitutional.

(a) Alleged Violations of Articles 74.11 and 74.12 of the HCL

253.
The Respondent argues first that OEPC concealed the fact that it had concluded a Farmout with AEC without prior authorization by the Minister. In the words of the Respondent:

It is undisputed that OEPC entered into the Farmout Agreement and Joint Operating Agreement without prior authorization, and that no subsequent authorization was ever granted. While the Claimants have alleged that OEPC was led to believe that no authorization was required for their agreements with AEC, they do not contend that OEPC obtained authorization. The only question, therefore, is whether those agreements gave rise to a consortium or association for the exploration or production operations, or whether they constituted a transfer of rights or private agreement for the assignment of one or more rights under the Participation Contract. (Emphasis in original)

254.
From the Respondent's perspective, the parties' dispute is quite straightforward. The Respondent maintains that certain core facts are agreed by the parties, including the following which it deems "fatal" to the Claimants' case, i.e. that (i) OEPC consistently told the Government that it planned to transfer only an "economic interest" to AEC; (ii) OEPC never informed the Government that AEC had been given operational and managerial rights relating to Block 15; (iii) OEPC never provided copies of the Farmout documents to the Government; and (iv) OEPC never described the transaction as a "farmout" in any communication with the Government.
255.
The Respondent is of the view that the Claimants are guilty of "a lengthy pattern of deception" and that they "deserved to lose their contract". The Claimants are also accused of seeking to "distract from the evidence of their deceit by calling into question the fairness of the caducidad process itself."
256.
Regarding the Claimants' contention that the Respondent allegedly gave OEPC the impression that authorization was not required in the circumstances, the Respondent argues:

The Claimants contend that OEPC was justified in going forward with its agreements with AEC without Ministry authorization, because Ecuadorian officials led them to believe that authorization was not necessary. This contention fails for two simple reasons. First, the officials in question could not possibly have offered a meaningful appraisal as to whether or not authorization was required without knowing the true nature of OEPC's agreements with AEC, and OEPC knew this. Second, those officials repeatedly emphasized to OEPC that it would need to seek authorization from the Ministry before making any transfer of rights. (Emphasis in original)

257.
As previously noted, the Respondent further argues that the Farmout resulted in more than the transfer of a mere "economic interest" and that the use of this term "was clearly calculated to mislead." The reality, according to the Respondent, is that "[f]ar from being a mere transfer of a passive ‘economic interest,' the Farmout Agreement and its attendant Joint Operating Agreement immediately made AEC a full partner in the Block 15 operations and transferred to it significant managerial rights and responsibilities."
258.

Referring inter alia to Article 5.9 of the Joint Operating Agreement entitled "Voting Procedure," the Respondent emphasizes that "all significant operational decisions regarding Block 15 required AEC's approval" The Respondent quotes this provision:

5.9 Voting Procedure

[...]

5.92 The following acts shall require affirmative vote of one (1) or more Parties then having collectively at least sixty-six and two-thirds percent (66-2/3%) of the Participating Interests [which would necessarily include AEC]:

5.9.2.1 Approval of a Development Plan;

5.9.2.2 Approval of a Work Program and Budget or any amendment or modification thereof;

5.9.2.3 Overexpenditures on any line item of an approved Work Program and Budget by more than twenty percent (20%) or U.S. $1,000,000, whichever is less, of the authorized amount for such line item, or overexpenditures for a Calendar Year of a total Work Program and Budget by more than ten percent (10%) or U.S. $5,000,000, whichever is less; and

5.9.2.4 Decisions on financing Joint Operations (including any decisions to repay indebtedness on any such financing) prior to the Transfer Date.

[…]

259.
The Respondent adds:

[F]rom the outset OEPC was "obligated, at the sole risk, cost and expense of [AEC], to act with respect to the Farmout Interest of AECI as AECI shall direct from time to time as if AECI were a party to the Participating Agreements owning legal title to a 40% interest in the Participating Agreements and the interests therein granting in Block 15."

The Farmout Agreement added, moreover, that AEC would be entitled to all "rights and benefits... in the same manner and to the same extent as if AECI held legal title to a 40% economic interest as a participant in the Farmout Property as a Non-Operator under the Joint Operating Agreement, both prior to and after legal title to the participating interest. is conveyed from OEPC to AECI." In substance, therefore, AEC was to be treated exactly as if it were an actual party to the Participation Contract as between AEC and OEPC from the moment the Farmout Agreement closed. Indeed, the fact that the Farmout Agreement granted AEC identical interests and powers before and after OEPC made the contemplated transfer of "legal title" to AEC shows that the transfer of formal "legal title" was inconsequential to AEC's control over the interests in question. (Emphasis in original)

260.
Emphasizing that the Joint Operating Agreement, at Article 7.2.1, provides that AEC may, on its own initiative, conduct "exclusive operations" in Block 15 (defined as operations chargeable to the account of less than all parties to the Agreement), the Respondent interprets the rights of AEC thereunder as follows:

These were not just paper rights. As shown by correspondence and meeting minutes between AEC and OEPC produced by the Claimants in this arbitration, AEC in fact frequently exercised its managerial and operational rights with respect to Block 15 and regarded the arrangement as a "joint venture" between the two companies. AEC was given, and exercised, voting rights with respect to well locations, contributed to planning and budgeting decisions, and participated in Block 15 operations in respect of which it demonstrated its willingness to exercise its rights on important development decisions.

[…]

As previously noted, one of the grounds for the Government's declaration of caducidad was that OEPC and AEC entered into an unauthorized consortium, in violation of the Hydrocarbons Law. And this is precisely what OEPC and AEC formed. Indeed, in their ordinary business communications, these companies themselves referred to their arrangement as a "consortium." In April 2004, for example, representatives from AEC and OEPC discussed the possibility of asking the Ministry for authorization for the transfer of "legal title" to OEPC's rights to AEC, and AEC's representatives indicated that AEC would prefer to delay seeking Government authorization for the time being: "For your info, my current preference is to do nothing this calendar year, and next year approach the government with the proposal to pay the transfer tax, but continue to leave the ‘consortium' outside the country" - in other words, continue to hide it from the Government.

Their use of this terminology is not surprising, as the arrangement established between OEPC and AEC was of a nature that is commonly called a consortium in the international oil and gas industry. As Mr. Martin explains, the term "consortium" is typically used in the industry to encompass, among other things, "[a] group of companies operating jointly, usually in a partnership with one company as operator in a given permit, license, contract area, block, etc." Mr. Martin observes further that this concept "describe[s] exactly what international O&G companies undertake to do in farmout agreements and JOAs, including the Farmout Agreement and Operating Agreement that OEPC and AEC signed and used to carry out their activities on Block 15. (Emphasis in original)

261.
According to the Respondent, an Article 74 violation does not require proof of "control" per se :

[T]he Claimants' experts assert that AEC's Management Committee rights may have been insufficient to give it "control" of operations in Block 15. This is another red herring, because a third party need not have "control" over operations in order for an Article 74 violation to occur. To the contrary, as explained by Dr. Merlo, a "transfer of rights" occurs when the contractor conveys to the transferee the right to participate in strategic and operational decisions relating to petroleum exploration or extraction, thereby giving it influence over operations. Similarly, a "consortium" is formed within the meaning of Article 74.12 if a contractor and a third party "enter into a binding agreement in which they commit themselves to work together for exploration or production operations." Hence, neither type of violation is contingent on the third party obtaining "effective operational control."

262.
In any event, it is the Respondent's position that AEC actually exercised managerial and operational rights from the outset of its relationship with OEPC. The Respondent accordingly submits that OEPC and AEC formed an unauthorized consortium for the exploration and production of oil in violation of Article 74.12 of the HCL. Furthermore, the Respondent rejects the Claimants' contention that a "consortium" requires the formation of a separate legal entity to carry out the joint operations. Referring to Ecuadorian case law in this regard, the Respondent contends:

Thus, whereas the Claimants contend that the formation of a consortium requires the creation of a distinct legal person, the decision clearly states that the mere agreement between the parties to enter into a consortium (as defined by the Court) is sufficient to create a consortium and that, as a consequence of the parties' agreement, a new legal entity exists, without the need to accomplish any special formality.

It cannot be disputed that OEPC and AEC both (i) "contributed something in common" (with AEC's contribution consisting of, inter alia, providing funding and expertise for the development of Block 15), and (ii) "divided among them[selves] the benefits derived from the common activity," in the proportion of 60%-40%, less the operating costs born in the same proportion. It follows that OEPC and AEC did form a consortium, according to the definition given by the Court. It also follows, although this is not relevant to the present case, that this consortium had legal standing as a separate legal person. (Emphasis in original)

263.
In addition, the Respondent maintains that the formation of a consortium under Ecuadorian law does not require that the third party assume joint and several liability for the performance of the Participation Contract.
264.
The Respondent also contends that the Farmout constituted a transfer of rights and an agreement to assign rights to AEC in violation of Article 74.11 of the HCL. It argues that, for purposes of this provision, "it is not necessary for the contractor to divest itself completely of the rights in question; it is enough if the contractor agrees to share those rights with a third party, or otherwise gives the third party the ability to influence the contractor's performance of the contract." In fine, the Respondent characterizes the Claimants' contention that an actual "assignment" has not been effected in the circumstances as a "red herring".
265.
Turning to the Claimants' contention that OEPC in fact revealed the farmout transaction with AEC to Ecuadorian officials, the Respondent denies that any such disclosure was made and refers in particular to the meeting among OEPC, AEC and Minister Teran in the latter's office in Quito on 24 October 2000:

At the meeting, OEPC and AEC brought up their contemplated transaction relating to Block 15. They spoke in generalities from a prepared "script," without referring to their transaction as a "farmout," and without ever providing Minister Terán with the Farmout Agreement or the Joint Operating Agreement. Nevertheless, that script (now disclosed by the Claimants in this arbitration) confirms that OEPC and AEC concealed the true nature of the transaction from Minister Terán.

The script begins by asserting that "Oxy and AEC have agreed that AEC will assume a 40% economic interest" and that there will be "no change in the operations" and "no initial change in the contractual rights and obligations or legal title for [Block 15]." What Minister Terán did not know, of course, was that significantly more was being transferred to AEC. OEPC's script also suggests that OEPC stated that at a later date it "would seek to transfer 40% of our legal title subject to the Government's approval," although, as Minister Terán has testified, OEPC assured Minister Terán that this was a matter to be left for future negotiation and would be subject to Ministry approval, if it happened at all. (Emphasis in original)

266.
In this regard, the Respondent further recalls the follow-up letter of 25 October 2000 sent to Minister Terán by Paul MacInnes. In this letter, OEPC expressly requests "that the Ministry of Energy and Mines confirm as soon as possible, its consent with respect to the aforementioned transfer of economic interest in favour of [AEC]." The Respondent argues that this letter fails to disclose that OEPC had in fact already concluded a binding agreement with AEC, and alleges that OEPC continued to conceal this fact when it made a presentation to the Joint Management Committee of the Limoncocha and Edén-Yuturi Fields on 22 November 2000.
267.

Furthermore, the Respondent recalls the meeting between OEPC and the DNH on 14 December 2000. According to the Respondent, OEPC's representatives present at this meeting "falsely represented to the Government that [OEPC] was still in negotiations with AEC over a possible future transaction". This meeting led to the letter by Minister Terán to OEPC dated 17 January 2001, which the Respondent characterizes as follows:

For avoidance of doubt, Minister Terán made sure that OEPC knew the consequences of making a transfer without authorization. In his January 17, 2001 letter, Minister Terán stated in no uncertain terms:

Executive Decree No. 809, which contains the Regulation to Art. 79 of the Hydrocarbons Law, published in the Official Register No. 197, dated May 31, 1985, in its Article I stipulates that the total or partial transfer of rights and obligations derived from a contract may be assigned in favour of third parties with the prior authorization of the Corresponding Ministry, otherwise such transfer will be invalid and will give rise to the contract's termination.

Thus, Minister Terán specifically warned OEPC, as early as January 2001, that a transfer of rights without approval would result in caducidad. Unbeknownst to the Government, however, the deed had already been done - back in October 2000. (Emphasis in original)

268.
The Respondent then addresses its discovery of what it refers to as the "true nature" of OEPC's relationship with AEC and the investigation that led to the caducidad proceedings and, ultimately, the Caducidad Decree. This discovery is alleged to have been made in the context of the 2003/2004 Moores Rowland's audit of OEPC. The Respondent disputes the Claimants' suggestion that the caducidad proceedings were initiated in retaliation to the VAT arbitration. Rather, according to the Respondent, "the proximity of those events was of the Claimants' own making." The Respondent particularizes its position as follows:

Specifically, it was the Claimants' decision to make their request for transfer of "legal title" to AEC immediately after the VAT Award was dispatched to the parties that led to the discovery of the details of the relationship between OEPC and AEC by the Minister of Energy and Mines and the Attorney General. The timing of that request - following as it did on the heels of the VAT Award -could not have been coincidental.

As the witness statement from OEPC witness Paul MacInnes reveals, AEC had completed its required payments under the Farmout Agreement by the spring of 2004. Under the terms of the Farmout Agreement, OEPC should have immediately sought authorization from the Government for the "second stage" of the transaction, i.e., the transfer of "legal title" to AEC. But OEPC did not make any such request at that time. Instead, it delayed for several months, failing to make the request until July 15, 2004, immediately after the award in the VAT Arbitration was dispatched to the parties.

OEPC must also have known that any request for the transfer of "legal title" to AEC would prompt scrutiny from the Ministry, given that the Ministry was bound to conduct an investigation whenever a request for the transfer of rights was made. OEPC must also have known that this could lead to the discovery of the offending agreements by Government officials who would be able to appreciate their significance. This may explain why OEPC did not make an immediate request for the transfer of "legal title" to AEC when AEC's payments were completed in Spring 2004, and, instead, delayed until the VAT Arbitration had concluded. Indeed, correspondence between OEPC and AEC in April 2004 confirms the parties' intent, for the time being anyway, to "continue to leave the ‘consortium' outside the country." OEPC would have known that if it prevailed in the VAT Arbitration, then made its request for transfer of legal title to AEC, any adverse response by the Government could be made to appear retaliatory in nature. OEPC has certainly not hesitated to characterize the Government's response in precisely that manner in this arbitration.

269.
The Respondent then refutes the Claimants' denial of motive to conceal the Farmout Agreements in the following words:

The objective reality, however, is that the Claimants most certainly did have at least two motives to conceal the Farmout: (i) the desire to avoid the payment of a transfer fee and the enhancement to the economic terms of the contract, and (ii) the desire to avoid any potential delay or complications that could have been associated with the Ministry's evaluation of the Claimants' transfer request. Further, AEC, in the context of deciding not to seek approval for the second phase transfer, noted that it would have to "approach the government with the proposal to pay the transfer tax," and OEPC said that AEC might be concerned about "anti-trust provisions." (Emphasis in original)

270.
The Respondent concludes that, in any event, the Claimants' motive is irrelevant in the circumstances.
271.
Finally, the Respondent argues that the caducidad proceedings at all times afforded the Claimants due process since OEPC was afforded the opportunity to respond at each stage of the process.

(b) Alleged Violations of Hydrocarbons Regulations

272.
As part of a parallel line of argument in support of its position that the Caducidad Decree complied fully with Ecuadorian law, the Respondent contends that OEPC not only sought to conceal the Farmout Agreements, but that its behaviour "was also a repeat violation of the laws governing oil exploitation" thus forming "a secondary, but entirely independent reason for caducidad. " These violations, however, are not said to have been "essential" to the Minister's decision to declare caducidad.

(c) Alleged Diplomatic Pressures

273.

The Respondent asserts that it has discovered a third "separate" and "independent" justification for termination of the Participation Contract in the circumstances based on the Claimants' repeated use of diplomatic channels to put improper pressure on Ecuadorian authorities in violation of Clause 22.2.1 of the Participation Contract. In this regard, the Respondent does not accept the Claimants' explanations:

In any event, the point that the Claimants are now attempting to make - i.e., that the Claimants lobbied the U.S. Government with regard to the VAT arbitration but did not with regard to this dispute - is a distinction without a difference. Both are prohibited under the plain terms of the Participation Contract, and both give Ecuador grounds to declare caducidad. The Participation Contract prohibits the use of "diplomatic or consular channels" with regard to any "controversies that may arise as a result of this Participation Contract." Article 22.2.1 of the Contract provides:

"In the event of controversies that may arise as the result of the performance of this Participation Contract, in accordance with Ecuadorian law, Contractor expressly waives its right to use diplomatic or consular channels, or to have recourse to any national or foreign jurisdictional body not provided for in this Participation Contract. Lack of compliance with this provision shall constitute grounds for the caducidad of this Participation Contract."

[…]

More to the point, Ecuador certainly has presented evidence of post-2002 lobbying pressure with its Counter-Memorial. Among the evidence already identified by Ecuador as showing post-2002 lobbying pressure is a telling e-mail exchange between the Claimants and the U.S. State Department on August 2326, 2004. An examination of this document shows that it is a communication initiated by the Claimants, inviting U.S. Government assistance in this very dispute. (Emphasis in original)

3. The Respondent's Defense to the Claimants' Second Main Argument: The Caducidad Decree Complied Fully with the Treaty and International Law

274.
By way of a preliminary observation regarding the Respondent's defense to the allegation that the Caducidad Decree was issued in violation of both the Treaty and international law, the Tribunal notes that the Respondent's first written submissions on this point were filed prior to the Tribunal's Decision on Jurisdiction referred to earlier in this Award. The Respondent contends that the Claimants' Treaty claims are necessarily defective in light of the Claimants' failure to challenge the Caducidad Decree before the Ecuadorian courts. In the words of the Respondent:

In its Decision on Jurisdiction, the Tribunal denied Ecuador's request for a stay of the arbitration pending OEPC's pursuit of claims before Ecuadorian courts, but the denial of the request was in no way dispositive of Ecuadorian courts. The Tribunal based its decision to deny the stay on its conclusion that the Claimants were not contractually required to pursue their claims before Ecuadorian courts. Decision on Jurisdiction ¶96. The reasoning of the Tribunal seems to have been that since the Claimants were not contractually required to bring their claims in Ecuador, there was not basis to direct them to pursue claims in that forum before their present claims could be addressed on the merits. That conclusion does not dispose of the present argument because Ecuador's position is that the Claimants' Treaty claims are substantively defective even if the Tribunal has jurisdiction over those claims and the Claimants were not contractually required to bring their claims in Ecuador. This is true for the simple reason that (as developed more fully below) the act of the Minister in issuing the Caducidad Decree cannot attach responsibility to the State as a substantive matter when there was a mechanism available for the review of that act, which the investor simply failed to invoke. (Emphasis in original)

275.
Because termination of the Participation Contract by way of caducidad was, according to the Respondent, proper under Ecuadorian law, "this leads to the inevitable conclusion that it was not an expropriation". The Respondent contends that it is not open to this Tribunal to conclude otherwise in the absence of a contrary ruling by the Ecuadorian courts:

When considering the propriety of the termination under the Participation Contract and its governing law, it is important to keep in mind that the Caducidad Decree carries with it a presumption of validity, which may be overcome only through a determination in an Ecuadorian administrative court. Because the Claimants have not sought such a determination, they could not possibly establish that the termination was wrongful under the Participation Contract or under Ecuadorian law generally. It bears noting in this regard that several BIT tribunals have acknowledged that an investor cannot state a valid treaty claim if the viability of the claim under international law turns on whether or not a contract governed by municipal law has been violated, and the investor has not sought a ruling on that issue from a domestic court - provided, of course, that the investor had the opportunity to pursue such a claim.

276.
The Respondent adds that the Claimants' Treaty and international law claims are unsustainable even if redress had been sought before the Ecuadorian courts. The Respondent argues:

The Claimants can hardly maintain that an expropriation occurred, or that their legitimate expectations were violated, given that Ecuador issued the Caducidad Decree in response to OEPC's own violations of the Hydrocarbons Law, particularly where the Participation Contract itself explicitly provided for that result in such a situation. Nor can the Claimants credibly claim to have been subjected to any arbitrary or discriminatory treatment, given that the Minister's decision was grounded in Ecuadorian law and was open to review by competent Ecuadorian courts, and there were valid reasons for him to terminate the OEPC's contract, while leaving in place those of other investors. The simple truth is that the Claimants have no one but themselves to blame for the forfeiture of their investment.

277.
The Respondent's submissions to the effect that it did not violate the Treaty or international law are articulated as follows:

(i) the Respondent did not expropriate the Claimants' investment because the termination of a contract in accordance with its terms and governing law is not an expropriation, and the Caducidad Decree was a bona fide administrative sanction in furtherance of a legitimate regulatory policy;

(ii) the Respondent did not violate the obligation to provide treatment "no less favourable;"

(iii) the Respondent did not arbitrarily or discriminatorily impair OEPC's investment;

(iv) the Respondent did not deny the Claimants fair and equitable treatment because, inter alia, the Claimants' "legitimate expectations" theories (estoppel, disproportionate sanction and absence of due process) are unwarranted and, additionally, it cannot be unfair and inequitable for the State to exercise a right explicitly granted to it in a contract with the investor, in the absence of any showing that the contract was obtained by fraud or duress, or was otherwise unenforceable;

(v) the Respondent did not deny the Claimants full protection and security;

(vi) the Respondent did not violate the umbrella clause; and

(vii) the Respondent did not violate the Treaty based on conduct of PetroEcuador.

278.
The Respondent emphasizes that it acted in good faith in relation to OEPC's investment, that the Caducidad Decree was consistent with OEPC's legitimate expectations because it was specifically provided for under Ecuadorian law and the Participation Contract and that the caducidad proceedings comported with due process and were not motivated by political considerations. Specifically, regarding the Claimants' allegation that the Respondent favored other contractors (such as Canada Grande, Petrobras and Petrocol), it argues that these instances are readily distinguishable from the present case.
279.
The Respondent is also of the view that the Claimants' submissions on the proportionality of the caducidad sanction are without merit and that the Claimants' assertion that it should have refrained from imposing caducidad in the absence of specific harm or damage should be rejected.
280.
Additionally, the Respondent argues that, contrary to the Claimants' suggestion, it was not estopped in the circumstances from declaring caducidad. The Respondent maintains:

The Claimants do not come close to meeting the Temple of Preah Vihear [estoppel] standard. To begin with, neither the Ministry, nor any other Ecuadorian official, ever made a "clear statement of fact" that authorization was not required for an agreement of the nature that was actually signed between OEPC and AEC, let alone one that was "voluntary, unconditional, and authorized." Indeed, no indication from an official to the effect that authorization did not seem to be necessary could have been "voluntary," because the Claimants withheld key details of OEPC's contractual arrangements with AEC in their discussions with officials, and never gave them a copy of the actual agreements. Moreover, there was no "reliance in good faith" by OEPC, let alone detrimental reliance. OEPC could not have relied on any statements of Ecuadorian officials in good faith because it had concealed key details from them, and was aware that they had no way of knowing the true nature of OEPC's agreements with AEC. And there was certainly no detrimental reliance by the Claimants, because - far from suffering any detriment - OEPC made profits from its investments in Ecuador that were made after the Farmout was signed.

281.
In conclusion, the Respondent reiterates its position as to the Claimants' expectations in the circumstances of the present case:

In the instant case, the Claimants' expectations at the time OEPC made its investment were necessarily shaped by the terms of the Participation Contract and the Hydrocarbons Law, both of which explicitly prohibited transactions of the nature that OEPC surreptitiously entered into with AEC, and provided that caducidad would be the sanction for any such unauthorized agreements. The Claimants' expectations were further confirmed by the letters from the Ministry and DNH, which both stated that prior authorization would be required before any such agreement could be concluded. Despite knowing full well about that prohibition, and the sanction that would result if their violations came to light, the Claimants went ahead and entered into the Farmout Agreement and the Joint Operating Agreement with AEC, without prior authorization from the Ministry, and concealed the true nature of both agreements from Ecuadorian authorities. In this context, the Claimants cannot credibly claim that they had a legitimate expectation that caducidad would not be declared when their violations were discovered, and they have no equitable basis to seek relief from this Tribunal.

282.
The Respondent's counterclaim and the Claimants' response thereto, are summarized next.

IV. THE RESPONDENT'S COUNTERCLAIM

A. The Respondent's Position

283.
The Respondent filed a counterclaim against the Claimants on the basis of four distinct grounds:

(i) malicious prosecution (abuso del derecho) in relation to these ICSID proceedings;

(ii) breach of Clause 22.2.1 of the Participation Contract regarding waiver of the right to use diplomatic or consular channels;

(iii) the Claimants' allegedly destructive and unlawful conduct following the Caducidad Decree, including alleged damage to data and software as well as unavailability of drilling rigs; and

(iv) the Claimants' alleged failure to pay the required assignment fee and negotiate a new participation contract more favourable to the Respondent in accordance with Article 79 of the HCL.

284.
The Respondent's submissions regarding the first two heads of its counterclaim are based principally on allegations of bad faith and coercion on the part of the Claimants, as reflected by the following:

The Claimants have launched these proceedings knowing that their claims in relation to caducidad are objectively baseless and cannot succeed. They have done so to apply further severe pressure on Ecuador - both in itself and in combination with procuring the U.S. Government pressure noted herein - in order to coerce settlement and other concessions by making it extremely difficult for Ecuador to maintain its defense in this action, and also to avoid the financial consequences of creating a means by which synthetic interests in Block 15 could be traded and profits thereby earned and concealed.

In a growing number of cases, claimants who have asserted baseless claims purportedly founded in international law before ICSID or other tribunals have been ordered to pay the fees and costs of the Respondent State, in order to compensate the Respondent State for the burden and expense of defending the claims. In this case, however, recovery of fees and costs alone could by no means compensate Ecuador for all of the harm it has suffered from OEPC's wrongful conduct, which includes not only the expense associated with defending these unworthy claims, but also the loss of profits arising on the improper trading of Block 15 interests, and the substantial damage to Ecuador's reputation and economic prejudice in the market for foreign investment and world opinion.

285.
With respect to the amount of the damages which it says it has suffered as a result of the Claimants' fault, the Respondent maintains that they are not readily quantifiable in economic or material terms. The Respondent accordingly argues that, under both international law and Ecuadorian law, it is entitled to moral damages to redress the consequences of the Claimants' alleged malfeasance and prevent their unjust enrichment.
286.
In connection with the third ground of its counterclaim, the Respondent seeks economic damages to compensate it for losses allegedly suffered as a result of the Claimants' "destructive actions" regarding Block 15 following the issuance of the Caducidad Decree. The alleged "destructive actions" principally consist of the Claimants' (a) release of two drilling rigs required to maintain production levels at Block 15 and (b) deactivation of Block 15's operational software. These actions, the Respondent contends, resulted in lost production damages of over $80 million.
287.
The fourth and final head of the Respondent's counterclaim, based on the allegation that the Claimants failed to pay the assignment fee and negotiate a new participation contract more favourable to the Respondent in accordance with Article 79 of the HCL, is no longer pursued by the Respondent. It has made no attempt to quantify this claim during the quantum phase of this proceeding.

B. The Claimants' Position

288.
The Claimants characterize the first two heads of the Respondent's counterclaim as "ludicrous", and submit that they fail for the following reasons:

First, Ecuador's counterclaim for abuse of process is legally misconceived. The doctrine of abuse of process is seldom invoked in international practice, and Ecuador is unable to cite a single international-law case in which a tribunal has actually determined that an abuse of process occurred. The consensus that emerges from the cases that deal with the issue is that, as long as the tribunal has jurisdiction and the claims have been properly submitted, no abuse of process can have occurred. Indeed, the cases question whether the doctrine of abuse of process has any application at all in international arbitral practice.

[...]

Second, even if Ecuador's expansive notion of abuse of process has any merit, it would still fail because OEPC's claims are fully justified by the facts and the law, and Ecuador's allegation of bad faith is completely baseless. (Emphasis in original)

289.
Noting that the Respondent's counterclaim is based in part on the premise that the Claimants have put forward their own claims in order to obtain "leverage", the Claimants rebut this allegation of bad faith by reasserting their submissions on liability.
290.
As for the Respondent's allegations of "destructive actions" on the part of the Claimants, and in particular the release of two drilling rigs required to maintain production levels at Block 15, the Claimants maintain that nothing in the Participation Contract or the HCL required OEPC to maintain at the site equipment such as oil rigs that were no longer in use. The Claimants further argue that PetroEcuador could have assumed OEPC's oil rig contracts had it wished to recall the rigs itself. The Claimants otherwise contend that OEPC took all steps necessary to ensure the smooth transition of Block 15 from OEPC to PetroEcuador, and that any ensuing difficulties, including software-related issues, were the result of PetroEcuador's own failure to plan adequately for the Block 15 transition.

V. ANALYSIS

A. The Tribunal's Jurisdiction over the Claimants' Claims

291.
The Respondent at the outset maintains that the Claimants' Treaty claims are "substantially defective" even if the Tribunal has jurisdiction over these claims because "the act of the Minister in issuing the Caducidad Decree cannot attach responsibility to the State as a substantive matter when there was a mechanism available for the review of that act, which the investor simply failed to invoke." The Claimants were legally obliged, says the Respondent, to pursue a local challenge to the Caducidad Decree before the courts in Ecuador.
292.
In brief, the Claimants answer that this is a "recycled" version of the jurisdictional argument advanced by the Respondent in its jurisdictional challenge which has been dismissed by the Tribunal in its Decision on Jurisdiction8 and which is now being "reincarnated" as a merits defense.
293.

The Tribunal agrees with the Claimants. The matter is "res judicata".

294.
In its Decision on Jurisdiction, the Tribunal, after having referred to Article VI of the Treaty and Clause 2.2.2.1 of the Participation Contract, stated very clearly that it "does not accept that […] the parties agreed that caducidad -related disputes under the Participation Contract would solely be resolved by submission to the Ecuadorian administrative courts […]."9
295.
The Tribunal then concluded that it "has jurisdiction over the Claimants' claims under both the Participation contract and the Treaty".10
296.
This disposes of the Respondent's preliminary objection which is dismissed.

B. The Tribunal's Findings in Connection with the Claimants' Claims

1. OEPC's Breach of the Participation Contract

(a) Preliminary Observations

297.
At the heart of the Claimants' case in this arbitration lies the issue of whether the Respondent, by issuing the Caducidad Decree on 15 May 2006, validly terminated the Participation Contract in accordance with both the Participation Contract itself and its governing law, namely Ecuadorian law and, in particular, the Hydrocarbons Law. In addressing this issue, the Tribunal must first answer the specific question of whether OEPC, upon entering into the Farmout Agreement and the Joint Operating Agreement with AEC, (i) transferred or assigned rights under the Participation Contract contrary to Clause 16.1 of the Participation Contract and in violation of Article 74.11 of the HCL, and/or (ii) created a consortium contrary to Clause 16.4 of the Participation Contract and in violation of Article 74.12 of the HCL. In the event the Tribunal answers this question in the affirmative, it will then have to determine whether or not authorization was obtained in the circumstances - it is undisputed that in either instance, authorization on the part of the Ecuadorian authorities was indeed required. And in the event that the Tribunal finds that such authorization was not obtained, it will thereafter need to address the question of whether or not the termination of the Participation Contract and the Unitized Fields Joint Operating Agreements by the Respondent through the declaration of caducidad was consistent with both the Treaty and customary international law as well as Ecuadorian law, and in particular whether or not it was a proportionate sanction in the circumstances.
298.
As noted earlier in this Award, whilst the Claimants' wrongful termination submissions (as well as those of the Respondent) regarding the above significantly overlap, they predominantly address the Respondent's allegations of an unauthorized transfer or assignment as opposed to the Respondent's allegations of an unauthorized consortium. The Tribunal will thus consider first the central issue of whether the Farmout Agreement and the Joint Operating Agreement operated a transfer or assignment of rights under the Participation Contract contrary to Clause 16.1 thereof and in violation of Article 74.11 of the HCL.
299.
Crucial to this issue of the alleged prohibition to transfer or assign rights under the Participation Contract are Clauses 16.1 and 16.2, which will be quoted again for ease of reference. They read as follows:

SIXTEEN: TRANSFER AND ASSIGNMENT.-

16.1 Transfer of this Participation Contract or assignment to third parties of the rights under the Participation Contract, must have the authorization of the Corresponding Ministry, in accordance with existing laws and regulations, especially the provisions contained in Art. 79 of the Hydrocarbons Law and Executive Decrees No. 809, 2713 and 1179.

16.2 The prohibition to transfer or assign rights under this Participation Contract without the approval of the Corresponding Ministry, as determined in Art. 79 of the Hydrocarbons Law, is not an obstacle to freely trade Contractor's stock, without need of said authorization, provided that the trading of said stock does not change, modify or extinguish the legal existence of Contractor, nor constitute a decrease in its administrative, financial and technical capacities with reference to this Participation Contract.

[…]

300.
The Respondent argues that it was entitled to terminate the Participation Contract in accordance with Clause 21.1.2 thereof, which expressly provided that the Participation Contract shall terminate "[d]ue to a transfer of rights and obligations of the Participation Contract without prior authorization of the Corresponding Ministry". The Claimants, the Tribunal recalls, deny that the Farmout Agreement and the Joint Operating Agreement operated a transfer or assignment of contractual rights and obligations under the Participation Contract. They accordingly contend that prior authorization in connection with these Agreements, when entered into in 2000, was not required.

(b) Evidence of a Transfer of Rights under the Participation Contract

301.
As explained in more detail below, based on its review of the entirety of the record, the Tribunal considers that there is ample evidence to conclude that the purpose of the Farmout Agreement and the Joint Operating Agreement was to transfer from OEPC as Contractor to AEC certain of the Contractor's exclusive rights to carry out the oil exploitation activities under the Participation Contract, as set forth under Clause 4.2 of the Participation Contract, along with related rights and obligations.
302.
The evidence of the intention to transfer OEPC's exclusive right to carry out the oil exploitation activities under the Participation Contract to AEC is found principally in the Joint Operating Agreement which the parties entered into as envisaged in the Farmout. Indeed, the very terms of the Joint Operating Agreement define its scope by reference to an apportionment of rights under the Participation Contract as between OEPC and AEC. Clause 3.1.1 of the Joint Operating Agreement - under the heading entitled "Scope" - stated that "[t]he purpose of this Agreement is to establish the respective rights and obligations of the Parties with regard to operations under the Participation Agreements [which include the Participation Contract], including without limitation the joint exploration, appraisal, development and production of Petroleum from the Agreement Area (Emphasis added) This, in the Tribunal's view, explicitly evidences that the Joint Operating Agreement was intended to effectuate a transfer of rights and obligations held under the Participation Contract to the benefit of AEC.
303.
Similarly, the terms of Clause 3.3.1 of the Joint Operating Agreement - under the heading entitled "Ownership, Obligations and Liabilities" - stated that "[u]nless otherwise provided in this Agreement, all the rights and interests in and under the Participating Agreements, all Joint Property and any Petroleum and any Petroleum produced from the Agreement Area shall, subject to the terms of the Participating Agreements, be owned by the Parties in accordance with their respective Participating Interests." (Emphasis added) Again, this language explicitly evidences that the Joint Operating Agreement served to operate a transfer of rights and obligations held under the Participation Contract, resulting in AEC's purported "ownership" over these rights to the extent of its Participating Interest.
304.
The Tribunal concludes that by virtue of having "ownership" over "all the rights and interests in and under the Participating Agreements", albeit to the extent of its 40% respective Participating Interest, the parties intended that AEC acquire such ownership as a result of a transfer of such rights and interests effected by the Joint Operating Agreement.
305.
The Tribunal observes that the prohibition to transfer or assign rights and obligations under the Participation Contract is not expressed as being limited to total transfers or assignments. This prohibition must be interpreted as encompassing partial transfers or assignments such as the one effected by the Joint Operating Agreement. In the event of a transfer or assignment of rights and obligations under the Participation Contract, authorization was required regardless of whether (i) only a percentage of such rights and obligations was being transferred or assigned, (ii) only some and not all of such rights and obligations were being transferred or assigned, or (iii) only some aspect and not all aspects (for instance legal title) of such rights and obligations were being transferred or assigned. As set out in paragraphs 612-659 below, without this authorization, any purported transfer (including a partial transfer) was invalid under the HCL. The Tribunal's finding in this regard is also confirmed by HCL-related legislation, such as Executive Decree No. 80911, which expressly contemplates that both partial and total transfers of rights and obligations must be authorized.
306.
Although the Farmout was sometimes characterized by the Claimants as "merely" transferring to AEC, in 2000, a 40% economic interest in Block 15, as opposed to legal title to an interest in Block 15, the Tribunal does not accept that the transaction, whatever may have been the parties' intention, did not serve to effectuate a transfer of rights and obligations requiring authorization on the part of the Ecuadorian authorities. As noted above, neither the Participation Contract nor the HCL allow a narrow reading of the concepts of transfer or assignment. They must be read as including all forms of such transfers or assignments, be they total or partial in nature. The fact that OEPC may have retained legal title in order to prevent any privity as between AEC and Ecuador in relation to the Participation Contract - an issue which is addressed in more detail later in this Chapter - does not, per se, mean that a transfer of rights and obligations was not intended by the Joint Operating Agreement. Indeed, the Tribunal has already found that the Joint Operating Agreement, by its very scope, contemplates such a transfer.
307.
In addition, the Tribunal is not persuaded by the Claimants' contention that, irrespective of the Joint Operating Agreement, OEPC remained at all times the "sole guarantor" of the rights and obligations under the Participation Contract vis-à-vis Ecuador and that, consequently, these rights and obligations could not have been transferred to AEC. The reality is that by entering into the Joint Operating Agreement, OEPC agreed to share with AEC some of the rights and obligations it had under the Participation Contract and, in so doing, it agreed to a transfer of these rights and obligations. As such, prior authorization on the part of the Ecuadorian authorities was required.

(c) Nature of the Rights to be Transferred: The Joint Operating Agreement

308.
As previously mentioned, the parties disagree as to the true nature of the rights and obligations conferred by OEPC to AEC by virtue of the Farmout Agreement and, in particular, the Joint Operating Agreement. The Claimants, on the one hand, contend that, pursuant to the Farmout Agreements, AEC had no real power or influence in connection with Block 15 operations, whereas the Respondent, on the other hand, submits that the Farmout Agreements provided AEC with "operational" influence and control over OEPC's performance as a Contractor under the Participation Agreement.
309.
In support of its allegation of "operational" influence and control, the Respondent relies in particular on the funding and voting provisions of the Joint Operating Agreement as evidence that AEC had the ability to direct the day-to-day management or long-term strategy of Block 15 during the "earn-in" phase. The Claimants refute this contention, arguing that, during the "earn-in" phase, AEC had no right per se under the Joint Operating Agreement to force OEPC to operate Block 15 in one way or another. According to the Claimants, the only right that AEC obtained under the Joint Operating Agreement during the "earn-in" phase was the right to sit on the Management Committee. Most of the decisions by the Management Committee, they argue, did not require AEC's concurrence - only those in connection with development and work plans, budgets and joint operations. And the only consequence of a refusal by AEC to approve a work plan or budget or operation, they conclude, was that AEC would not be required to fund that particular operation.
310.
The Tribunal notes that paragraph 2(a)(ii) of the Letter of Intent expressly stated that the "Farmin Transaction is subject to the negotiation [...] of [...] a Joint Operating Agreement [...] providing the Parties joint control (in accordance with normal Joint Operating Agreement provisions) over programs and expenditures on Block 15." (Emphasis added) Thus, "joint control […] over programs and expenditures on Block 15" was clearly part of the Joint Operating Agreement's raison d'être.
311.
The Farmout Agreement itself refers to the Joint Operating Agreement as "govern[ing] exploration, exploitation, development, maintenance, operation and production of Block 15" (at Article 2.02). The Farmout Agreement also stated that OEPC was to "serve as Operator under the JOA" (ibid.).
312.

In this context, the Tribunal considers it apposite to highlight certain provisions of the Joint Operating Agreement:

(i) Article 4.2 of the Joint Operating Agreement under the heading "Rights and Duties of Operator" of Article 4 entitled "Operator":

4.2.1 Subject to the terms and conditions of this Agreement, Operator shall have all of the rights, functions and duties of Operator under the Participating Agreements and shall have exclusive charge of and shall conduct all Joint Operations. Operator may employ independent contractors and/or agents (which may include any Non-Operator, Affiliates of Operator and Affiliates of any Non-Operator) in such Joint Operations.

4.2.2 In the conduct of Joint Operations Operator shall:

[…]

4.2.2.4 Perform the duties for the Management Committee set out in Article 5, and prepare and submit to the Management Committee the proposed Work Programs, Budgets and AFEs as provided in Article 6. Operator shall perform all Joint Operations in accordance with approved Work Programs and Budgets;

[…]

(ii) Article 4.10.3 of the Joint Operating Agreement under the heading entitled "Removal of Operator" of Article 4 entitled "Operator":

4.10.1 Subject to Article 4.11, Operator shall be removed upon receipt of notice from any Non-Operator if:

[…]

4.10.3 Notwithstanding any provisions of this Article 4.10 to the contrary, in no event may Operator resign or be removed prior to the Transfer Date unless another Person legally entitled under the Participation Agreements to become a successor Operator may be appointed as successor Operator.

(iii) Article 5.2 of the Joint Operating Agreement entitled "Powers and Duties of Management Committee" of Article 5 entitled "Management Committee":

Without prejudice to the rights and duties of Operator under this Agreement, the Management Committee shall have power and duty to authorize and supervise Joint Operations that are necessary or desirable to fulfill the Participating Agreements and properly explore and exploit the Agreement Area in accordance with this Agreement and in a manner appropriate in the circumstances. […]

(iv) Article 5.9.2 of the Joint Operating Agreement entitled "Voting Procedure" of Article 5 entitled "Management Committee":

5.9.2 The following acts shall require affirmative vote of one (1) or more Parties then having collectively at least sixty-six and two-thirds percent (66-2/3%) of the Participating Interests [which would necessarily include AEC]:

5.9.2.1 Approval of a Development Plan;

5.9.2.2 Approval of a Work Program and Budget or any amendment or modification thereof;

5.9.2.3 Overexpenditures on any line item of an approved Work Program and Budget by more than twenty percent (20%) or U.S. $1,000,000, whichever is less, of the authorized amount for such line item, or overexpenditures for a Calendar Year of a total Work Program and Budget by more than ten percent (10%) or U.S. $5,000,000, whichever is less; and

5.9.2.4 Decisions on financing Joint Operations (including any decisions to repay indebtedness on any such financing) prior to the Transfer Date.

[...]

(v) Article 5.13.5 of the Joint Operating Agreement under the heading entitled "Effect of Vote" of Article 5 entitled "Management Committee":

5.13.5 No decision of the Management Committee shall be binding if it conflicts with a decision by any Integrated Management Committee with Petroecuador for the Eden-Yuturi Unit or the Limoncocha Unit or any other unit in which all or any portion of Block 15 is hereafter utilized.

(vi) Article 6.3 of the Joint Operating Agreement under the heading entitled "Production" of Article 6 entitled "Work Programs and Budgets":

On or before the 1st Day of October of each Calendar Year, Operator shall deliver to the Parties a proposed production Work Program and Budget detailing the Joint Operations to be performed in the Development Area and the projected production of schedule for the following Calendar Year. Within Thirty (30) Days of such delivery, the Management Committee shall agree upon a production Work Program and Budget.

(vii) Article 7.1.1 of the Joint Operating Agreement under the heading entitled "Limitation on Applicability" of Article 7 entitled "Operations By Less Than All Parties":

7.1.1 No operations may be conducted in furtherance of the Participating Agreements except as Joint Operations under Article 5 or as Exclusive Operations under Article 7. No Exclusive Operation shall be conducted which conflicts with a Joint Operation or which conflicts with any of the Participating Agreements.

(viii) Article 14.1 of the Joint Operating Agreement under the heading entitled "Relationship of Parties" of Article 14 entitled "Relationship of Parties and Tax":

The rights, duties, obligations and liabilities of the Parties under this Agreement shall be individual, not joint or collective. It is not the intention of the Parties to create, nor shall this Agreement be deemed or construed to create a mining or other partnership, joint venture or association or (except as explicitly provided in this Agreement) a trust. This Agreement shall not be deemed or construed to authorize any Party to act as an agent, servant or employee for any other Party for any purpose whatsoever except as explicitly set forth in this Agreement. It is understood that each Party is entering into this Agreement for the purpose of protecting and developing its Participating Interest. In their relations with each other under this Agreement, the Parties shall not be considered fiduciaries except as expressly provided in this Agreement.

313.
The Tribunal further recalls that the parties, during the Hearing, pointed extensively to Management Committee minutes for purposes of analyzing AEC's actual involvement with Block 15. The Claimants refer to such minutes as evidence that AEC was only consulted as a mere financial backer with no actual veto power regarding development plans, work plans and budgets, whereas the Respondent refers to such minutes as evidence that AEC's approval was required in connection with Block 15 expenditures and operations.
314.
The Tribunal has already found that, subject to paragraphs 612-659 below, by virtue of the Joint Operating Agreement, AEC was to acquire rights and interests in and under the Participating Agreements, to the extent of its 40% Participating Interest. But as can be gleaned from these provisions, the Joint Operation Agreement did not only seek to operate as a general transfer of certain rights and interests in and under the Participating Agreements. To the contrary, the Joint Operating Agreement resulted in the exercise of specific managerial and voting rights by AEC in connection with Block 15.
315.
In particular, the Tribunal notes that AEC was granted the right to veto all "acts" of significance under the Joint Operating Agreement as a member - on an equal footing with OEPC - of the Management Committee. Article 5.1 of the Joint Operating Agreement stated that "[t]o provide for the overall supervision and direction of Joint Operations, there is established a Management Committee composed of representatives of each Party holding a Participating Interest." The "Joint Operations", the Tribunal further recalls, are defined as "those operations and activities carried out by the Operator pursuant to this Agreement for Block 15" (Article 1.40 of the Joint Operating Agreement). As a member of the Management Committee, AEC thus acquired the " power and duty to authorize and supervise Joint Operations that are necessary or desirable to fulfill the Participating Agreements and properly explore and exploit the Agreement Area in accordance with this Agreement and in a manner appropriate in the circumstances" (Article 5.2). (Emphasis added)
316.
The Management Committee's "Voting Procedure" under Article 5.9.2 sheds further light on AEC's real and well defined rights in its capacity as a full member of the Committee. This provision identifies a number of "acts" which required a majority vote, (thus the vote of both AEC and OEPC), including inter alia "Approval of a Development Plan" (Article 5.9.2.1); "Approval of a Work Program and Budget or any amendment or modification thereof" (Article 5.9.2.2); "Overexpenditures on any line item of an approved Work Program and Budget by more than twenty percent (20%) or U.S. $1,000,000, whichever is less, of the authorized amount for such line item, or over expenditures for a Calendar Year of a total Work Program and Budget by more than ten percent (10%) or U.S. $5,000,000, whichever is less" (Article 5.9.2.3); and "Decisions on financing Joint Operations (including any decisions to repay indebtedness on any such financing) prior to the Transfer Date" (Article 5.9.2.4).
317.
In the Tribunal's view, these provisions demonstrate incontrovertibly that the Joint Operating Agreement conferred to AEC real and specific managerial and voting rights in connection with Block 15, and thereby sought to confer rights under the Participation Contract, and the Tribunal so finds.
318.
The fact that OEPC, as Operator, retained exclusive charge of all Joint Operations pursuant to Article 4.2.1 of the Joint Operating Agreement does not modify the Tribunal's finding. In this connection, the Tribunal notes that when, on 15 July 2004, OEPC made its formal request to PetroEcuador for the transfer to AEC of legal title to its 40% economic interest in Block 15, it confirmed explicitly that it would retain the operation of Block 15 both before and after the "earn-in" phase. In other words, OEPC remained sole Operator under the Participation Agreements both before and after AEC was to acquire legal title. Consequently, the fact that OEPC, after execution of the Farmout Agreement retained exclusive charge of all Joint Operations is not a relevant factor in the determination by the Tribunal of whether or not a transfer of rights to AEC was to occur prior to the vesting of legal title to those rights.
319.
A related issue - which the Tribunal need not determine in view of its earlier finding - concerns the question of whether AEC, prior to the vesting of legal title, was entitled to impose an "Exclusive Operation" in the event the Management Committee failed to reach agreement on a "Joint Operation." Article 7.1.1 of the Joint Operating Agreement provided as follows:

No operations may be conducted in furtherance of the Participating Agreements except as Joint Operations under Article 5 or as Exclusive Operations under Article 7. No Exclusive Operation shall be conducted which conflicts with a Joint Operation or which conflicts with any of the Participating Agreements.

320.
In the Tribunal's view, the issue of whether or not AEC could impose an Exclusive Operation under the Joint Operating Agreement prior to obtaining legal title is immaterial to the question of whether AEC acquired rights under the Participation Contract. AEC's rights in connection with Block 15 Exclusive Operations do not change the fact that the Joint Operating Agreement conferred to AEC specific managerial and voting rights in connection with such Block 15 Joint Operations, and thereby sough to confer rights under the Participation Contract, as found earlier by the Tribunal.
321.
Another argument by the Claimants is that AEC's specific managerial and voting rights cannot result in a transfer of rights under the Participation Contract because the Joint Operating Agreement did not allow for decisions on the part of the Management Committee that conflicted with the Participation Agreements. In support of this argument, the Claimants point to the above-quoted Article 7.1.1 of the Joint Operating Agreement, as well as Article 5.13.5 of the Joint Operating Agreement, which the Tribunal reproduces again for ease of reference:

5.13.5 No decision of the Management Committee shall be binding if it conflicts with a decision by any Integrated Management Committee with Petroecuador for the Eden-Yuturi Unit or the Limoncocha Unit or any other unit in which all or any portion of Block 15 is hereafter utilized.

322.
The fact that rights under the Joint Operating Agreement were to be exercised in accordance with the Participating Agreements (which would have been the case both before and after AEC had acquired legal title) does not imply that such rights were not being transferred to AEC or that they did not otherwise exist. It simply means, and the Tribunal so finds, that OEPC could not transfer other rights than those it held under the Participation Agreements: nemo dat quod non habet.
323.
The distinction which must be made is between rights that may (or not) have been immediately "exercisable" by AEC, as opposed to rights that were immediately "transferable" to AEC. Hence, the Claimants contend that even if the Joint Operating Agreement may appear on its face to transfer specific rights to AEC in connection with the day-to-day management and operation of Block 15, these rights, they aver, could only be exercised in the future, i.e. once legal title had been acquired by AEC.
324.
In other words, according to the Claimants, the Joint Operating Agreement did not operate an immediate transfer of rights, but rather a conditional transfer which would only vest upon transfer of legal title to AEC.
325.
The Claimants' expert on this point, Mr. Norman E. Maryan Jr., opined as follows: "I believe that the Parties intended the JOA in this case to be broadly drafted to enable its use both before and after legal title vested. I do not believe that such broadly drafted Joint Operating Agreements, such as the JOA in this case, can support the conclusion that AECI was vested with full rights of a non-operator from the inception of the JOA."12
326.
The Tribunal notes however that Mr. Maryan nuanced his opinion and admitted that the rights were indeed granted, albeit "apparently". He stated as follows: "I believe that many of the rights apparently granted AEC under the JOA could, in fact, not be fully exercised until after legal title vested."13 (Emphasis added)
327.
The Respondent's expert, Mr. A. Timothy Martin, when questioned at the Hearing on Mr. Maryan's views in this regard, opined as follows: "I disagree with this conclusion. It is my opinion that most of the rights that you would normally see in an industry JOA are, in fact, existent in this Operating Agreement, and they are fully exercised both before and after legal title vested."14 (Emphasis added)
328.
Thus, the parties' experts are in agreement that, on its face, the Joint Operating Agreement operated, at a minimum, an apparent transfer of rights, but they disagree as to whether such rights could be exercised by AEC prior to the transfer of legal title. In the Tribunal's view, the fact that the debate between the experts focussed on whether certain rights could be exercised, as opposed to whether such rights were to be transferred, is irrelevant for purposes of the findings the Tribunal has made in respect of its interpretation of the Joint Operating Agreement. The true issue is whether a transfer of rights was to occur between OEPC and AEC upon execution of the Farmout Agreement and the Joint Operating Agreement, i.e. whether a purported transfer of rights has been established, and the Tribunal has conclusively found this to be the case. The issue of whether such rights, once transferred, could or could not be immediately exercised is not relevant to the Tribunal's analysis.

(d) The Farmout Agreement

329.
The Tribunal has found in the previous Section that, by its terms, the Joint Operating Agreement purported to transfer rights to AEC which OEPC held under the Participation Agreements. In the present Section, the Tribunal finds that the Farmout Agreement by its terms, also purported to transfer rights to AEC, which OEPC held under the Participation Agreements.
330.
One of the central provisions of the Farmout Agreement, Section 2.01, provided that, during the "earn-in" phase, OEPC would "hold[] legal title to AECI's interest in the Farmout Property on behalf of AECI". The "Farmout Property" was defined in Section 1.01 as including "the Participation Agreements and the rights and interest therein granted to OEPC in and with respect to Block 15." Section 2.01 of the Farmout Agreement (quoted earlier) further provided, in relevant part, as follows:

Art. 2.01 [...]The Farmout Interest to be transferred to AECI as of the Effective Time includes a "working interest" or "participating interest" in the Participating Agreements and Block 15 except that it does not include nominal legal title to an interest in Block 15 or an interest as a party to the Participating Agreements. OEPC shall continue to own 100% of the legal title to the Participating Agreements and to the interests in Block 15 granted or provided for in the Participating Agreements; provided that from and after the Effective Time OEPC shall hold legal title to the interest in the Farmout Property represented by the Farmout Interest of AECI in the Participating Agreements and Block 15 as a "nominee" with the obligation to convey legal title to such interest to AECI, subject to obtaining required governmental approvals, promptly following AECI's payment of all amounts required to earn the interest in the Farmout Property represented by the Farmout Interest as hereafter provided and the expenditure of such amounts by OEPC as Operator under the JOA for Block 15 Capex (as hereinafter defined). Prior to such conveyance, while OEPC holds legal title to AECI's interest in the Farmout Property on behalf of AECI, OEPC shall be obligated, at the sole risk, cost and expense of AECI, to act with respect to the Farmout Interest of AECI as AECI shall direct from time to time as if AECI were a party to the Participating Agreements owning legal title to a 40% interest in the Participating Agreements and the interests therein granted in Block 15, subject to and in accordance with the terms and provisions of the JOA provided for in Section 2.02. (Emphasis added)

331.
It is clear to the Tribunal that this crucial Section 2.01 of the Farmout Agreement confirms that AEC was to have de facto legal title to its interest in the "Farmout Property," but that this title was to be "held" by OEPC on its behalf until the required governmental approvals were obtained. This provision further confirms that OEPC had undertaken to act as the Contractor under the Participation Contract - a right it had acquired on an exclusive basis - "as if’ AEC was a party to this Participation Contract. In reality, as between OEPC and AEC, the situation was identical both before and after conveyance of legal title in so far as the Participation Contract was concerned; they were operating de facto pursuant to the Joint Operating Agreement "as if" legal title had already been conveyed, and the ministerial authorization for the conveyance of legal title was a mere formality. More fundamentally, in the view of the Tribunal, this meant that OEPC was sharing with AEC its exclusive right to carry out Block 15 operations and was obligated "to act with respect to the Farmout Interest of AECI as AECI shall direct from time to time." This Section 2.01 of the Farmout Agreement, coupled with those provisions of the Joint Operating Agreement which the Tribunal reviewed previously, comfort the Tribunal in its conclusion that OEPC did indeed seek to transfer to AEC under these agreements rights it acquired from Ecuador under the Participation Contract.

(e) Privity of Contract

332.
One of the Claimants' main argument in support of its contention that OEPC did not transfer or assign rights under the Participation Contract to AEC contrary to Clause 16.1 of the Participation Contract and in violation of Article 74.11 of the HCL is that, until legal title was transferred to AEC, only OEPC remained liable vis-à-vis the Respondent and PetroEcuador for the performance of the Participation Contract and that only OEPC could enforce its rights under the Participation Contract. In other words, according to the Claimants, an assignment or transfer of contractual rights required privity between AEC and the Respondent and since the transfer of a 40% economic interest did not create such privity, AEC did not acquire rights in the Participation Contract that could be enforced against Ecuador.
333.
The Tribunal is not persuaded by the Claimants' submission. The fact that OEPC may have retained legal title and that no privity as between AEC and Ecuador existed in relation to the Participation Contract does not necessarily lead to the conclusion, in the circumstances of this case, that the Farmout Agreement and/or the Joint Operating Agreement did not purport to transfer rights from OEPC to AEC, as the Tribunal has found.
334.
The Tribunal observes that, if it adopted the Claimants' argument, an unauthorized transfer or assignment of rights in a case such as the present one, could never be found. Privity necessarily implies authorization on the part of the Ecuadorian authorities since it requires that AEC be made a party to the Participation Contract, which cannot happen without such authorization. The Claimants appeared to recognize that their argument was illogical since they acknowledged that "neither the transfer of economic interest nor the unauthorized transfer of legal title would have created privity."
335.
The Tribunal also observes that Article 4.01 of the Farmout Agreement confirms the Tribunal's conclusion. Under this Article, the conveyance of legal title and the creation of privity between AEC and PetroEcuador under the Participation Contract are clearly identified as two separate and distinct legal transactions. This Article, which is found in Part IV of the Farmout Agreement, titled "Assignment of Legal Title", reads as follows:

Art. 4.01 Promptly after AECI has made all payments of the OEPC Carry provided for in Sections 3.03, 3.04 and 3.05 and OEPC as Operator under the JOA has expended such amounts for Block 15 Capex, OEPC and AECI shall execute and deliver such documents as are required to convey legal title to AECI in and to a 40% economic interest in the Participating Agreements and Block 15 and to make AECI a party to the Participating Agreements as owner of such 40% economic interest (subject to obtaining required governmental approvals). Any transfer fees or administrative charges imposed by any government agency or department with respect to such transactions shall be paid by AECI. (Emphasis added)

336.
In sum, the absence of privity in the circumstances of this case is of no consequence in view of the Tribunal's earlier findings that OEPC sought to transfer to AEC rights it held under the Participation Contract. The Farmout Agreement itself confirms the Tribunal's conclusion.

(f) The Remaining Allegations of Breach of the Participation Contract and HCL Violations

337.
Having found that the Farmout Agreement and the Joint Operating Agreement purported to effect a transfer of rights under the Participation Contract from OEPC to AEC, the Tribunal need not address the question of whether it also created a consortium contrary to Clause 16.4 of the Participation Contract and in violation of Article 74.12 of the HCL. For the same reason, the Tribunal need not address the Respondent's allegations of technical infractions on the part of OEPC in violation of Article 74.13 of the HCL.
338.
Even if the Tribunal were to find in favor of the Respondent with respect to these allegations, these findings would not affect the conclusion of the Tribunal that the Caducidad Decree was not a proportionate response by Ecuador in the particular circumstances of this case.15 In addition, the Tribunal notes that whether it finds one, two or three violations by the Claimants of the HCL, the sanction remains the same: Caducidad. The sanction is not cumulative.
339.
The Tribunal will now turn to the issue of OEPC's obligation to obtain authorization from the "Corresponding Ministry" for this transfer and whether OEPC did seek such authorization.

2. OEPC's Duty to Obtain Authorization for the Transfer of Rights under the Participation Contract

340.
As noted earlier, it is undisputed that in order to proceed with a transfer of rights under the Participation Contract, OEPC was required to obtain prior authorization on the part of the Ecuadorian authorities. The previously-quoted Clause 16.1 of the Participation Contract clearly stated:

SIXTEEN: TRANSFER AND ASSIGNMENT.-

16.1 Transfer of this Participation Contract or assignment to third parties of the rights under the Participation Contract, must have the authorization of the Corresponding Ministry, in accordance with existing laws and regulations, especially the provisions contained in Art. 79 of the Hydrocarbons Law and Executive Decrees No. 809, 2713 and 1179. (Emphasis added)

341.

Just as clearly, Clause 21.1.2 of the Contract expressly provided that the Participation Contract shall terminate "[d]ue to a transfer of rights and obligations of the Participation Contract without prior authorization of the Corresponding Ministry." (Emphasis added) The Tribunal recalls that the Participation Contract tracks the requirements of Ecuador's HCL, in particular the following:

CHAPTER IX

Caducidad, Sanctions and Transfers

Art. 74. The Ministry of Energy and Mines may declare the caducidad of contracts, if the contractor:

[...]

11. Transfers rights or enters into a private contractor agreement for the assignment of one or more of its rights, without the Ministry's authorization ;

[…]

Art. 79. The transfer of a contract or the assignment to third parties of rights derived from a contract shall be null and void and shall have no validity whatsoever if there is no prior authorization from the Ministry of Energy and Mines, without prejudice to the declaration of caducidad as provided for in this Law.

[...] (Emphasis added)

342.
In its review of the evidence on this crucial issue, the Tribunal notes, firstly, that the Letter of Intent dated 9 August 200016, signed prior to entering into of the Farmout Agreement and Joint Operating Agreement, stated at paragraph 5 that the "Farmin Transaction would be expressly conditioned upon the approval by the respective Boards of Directors of AECI and Occidental Petroleum Corporation and necessary governmental approvals, if any, including without limitation, the approval of Ministry of Energy and Mines in Ecuador." (Emphasis added) There was thus no consensus between AEC and OEPC that ministerial authorization was necessary.
343.
The evidence before the Tribunal discloses that the debate within the ranks of OEPC as to whether or not ministerial authorization was necessary with respect to the first phase of the Farmout continued after the execution of the Letter of Intent. Two separate draft letters to the Ecuadorian Minister of Energy and Mines, both dated 23 October 2000, constitute proof eloquent that there were indeed two schools of thought in this regard. These draft letters prepared by OEPC officials set forth different courses of action and, in the Tribunal's opinion, assist in understanding the events that followed. The first draft letter, "Version A," is worded as follows:

I. BACKGROUND

1. As you are aware, OEPC and PETROECUADOR entered into a Participation Contract for upstream activities in Block 15 of the Amazon Region, in the terms and conditions contained in the corresponding Public Deed, recorded with the National Hydrocarbons Registry on June 2, 1999.

2. In order to reinforce the additional exploration work, development and production of Block 15, OEPC and AOEPC [AEC] are in the process of studying the possibility of executing an agreement based on which AOEPC [AEC] would contribute funds to finance part of the investments required for such purpose, in exchange of a share in the proceeds derived from such investment. AOEPC [AEC] would not acquire the rights and obligations derived from said Participation Contract, and OEPC will continue to comply with said Contract and will continue to be the sole liable party towards PETROECUADOR. Consequently, this negotiation only implies the acquisition by AOEPC [AEC] of an economic interest in the results produced by such additional exploration work, development and production of the Block 15 Participation Contract, without AOEPC [AEC] acquiring legal tile in said Contract. OEPC will continue to be the only entity with legal rights and obligations under the Block 15 Participation Contract.

3. Based on this negotiation, OEPC would recognize to AOEPC [AEC] the right to acquire legal title and an effective share in the Block 15 Participation Contract, once the several conditions that would be stipulated in the agreement, prior clearance from the Ministry of Energy and Mines, and other requirements of Ecuadorian laws and the Block 15 Participation Contract between OEPC and PETROECUADOR are met.

I. REQUEST:

In view of the above and based on the provisions contained in Article 74(1) and Article 79 of the Law on Hydrocarbons, as well as the regulatory rules issued for the application of said law, we request the following:

1. Please confirm whether, as is our understanding, the transaction described in the background to this request does not require the prior approval referred to in Article 74(11) and 79 of the Law on Hydrocarbons. As indicated above, this transaction does not imply an assignment of legal title or rights in the Block 15 Contract, but rather it is a simple recognition in favor of AOEPC [AEC] of an economic interest in the results derived from said contract. If, however, AOEPC [AEC] will acquire legal title and rights in the Block 15 Participation Contract once the conditions to be stipulated in said agreement are fulfilled, then prior clearance from the Ministry of Energy and Mines and compliance of other procedures and requirements contemplated by Ecuadorian laws would be required;

2. On a subsidiary basis, in the unlikely event that your answer to the preceding point is negative, we request you authorize OEPC to assign to AOEPC [AEC] an economic interest in the results produced by the additional exploration work, development and production of the Block 15 Participation Contract. In this case, we request you also authorize the agreement by virtue of which both companies would agree that once several conditions to be stipulated in the contract to be executed between them have been fulfilled, OEPC would transfer to AOEPC [AEC] legal title and rights in the Block 15 Participation Contract, prior compliance of other procedures and requirements contemplated by applicable Ecuadorian laws and regulations and the Block 15 Participation Contract. It should be noted that the transaction described in the background to this request would not, in any way, affect the rights and obligations assumed by the Contractor - OEPC - under the Participation Contract with PETROECUADOR; and that the transfer of rights in Block 15, which would be made once the several conditions to be stipulated in said agreement are fulfilled, would in no way diminish the capacity of the Block 15 Contractor. Not only would OEPC continue to be jointly liable for contract compliance, but AOEPC [AEC] would also be liable for the compliance of said obligations. It should also be noted that the financial, technical and operative capacity of AOEPC [AEC] to enter into upstream contracts has already been qualified by the Ecuadorian Government since the time Petroecuador executed several upstream contracts with said company.

3. Lastly, in the event the answer to the first point is negative, we would also appreciate your indicating whether the payments contemplated in Article 2.b of Presidential Decree 809 (Official Gazette 197, May 31, 1985) that regulates the application of Article 79 of the Law on Hydrocarbons must be made as a result of the authorization referred to in point 2 above; or, otherwise whether such sums must be paid only when the transfer of rights and obligations in the Block 15 Participation Contract, by OEPC in favor of AOEPC [AEC], becomes effective. As repeatedly stated above, the transfer would be made only when several conditions to be agreed in the agreement that would be negotiated are fulfilled, and after other formalities and requirements contemplated by Ecuadorian Law and the conditions stipulated in the Participation Contract have been met. (Emphasis added)

344.
Version B, on the other hand, is formulated as follows:

I. BACKGROUND

1. As you are aware, OEPC and PETROECUADOR entered into a Participation Contract for upstream activities in Block 15 of the Amazon Region, in the terms and conditions contained in the corresponding Public Deed, recorded with the National Hydrocarbons Registry on June 2, 1999.

2. In order to reinforce the additional exploration work, development and production of Block 15, upon receipt of all required government approvals, OEPC and AOEPC [AEC] will complete an agreement based on which AOEPC [AEC] would contribute funds to finance part of the investments required for such purpose, in exchange for a forty percent (40%) share in the proceeds derived from the Block including its unitized operations. AOEPC [AEC] would only acquire the rights and obligations derived from said Participation Contract at a future time and only after the Ministry of Energy and Mines granted its express approval, prior to the time that such rights are transferred. Until such future transfer is separately approved by the Ministry of Energy and Mines and finalized with OAEPC [ sic ] [AEC], OEPC will continue to comply with said Participation Contract and will continue to be the sole party liable to PETROECUADOR. Consequently, the agreement to be completed, for the present only implies the acquisition by AOEPC [AEC] of an economic interest in the results produced from the Block 15 Participation Contract, without AOEPC [AEC] acquiring any legal title in said Participation Contract. OEPC will continue to be the only entity with legal rights and obligations under the Block 15 Participation Contract.

3. In addition to the economic interest presently being acquired by AOEPC [AEC], as described above, and based on the negotiated agreement to be completed between OEPC and AOEPC [AEC], OEPC will commit to assign to AOEPC [AEC], sometime during or after January, 2005, legal title and an effective share in the Block 15 Participation Contract and its unitized operations, but only once the several conditions stipulated in the agreement, the requirement for prior clearance from the Ministry of Energy and Mines, and other requirements of Ecuadorian laws and the Block 15 Participation Contract between OEPC and PETROECUADOR are satisfied. Separate approval of this transfer of interest in the Block 15 Participation Contract and unitized areas will be sought from the Ministry of Energy and Mines at future time.

I. REQUEST:

In view of the above and based on the provisions contained in Article 74 (11) (12) and Article 79 of the Law on Hydrocarbons, as well as the regulatory rules issued for the application of said law, we request the following:

1. Please grant for this transaction the prior approval referenced in Articles 74 (11) (12) and 79 of the Law on Hydrocarbons or else indicate that no such approval is required for such transaction. As indicated above, this transaction does not imply a present assignment of legal title or rights in the Block 15 Participation Contract, but rather is a simple recognition in favor of AOEPC [AEC] of an economic interest in the results derived from said contract.

2. Under the negotiated agreement between OEPC and AOEPC [AEC], AOEPC [AEC] may acquire legal title and rights in the Block 15 Participation Contract and unitized areas, provided that approval from the Ministry of Energy and Mines is obtained prior to the time of the transfer, and further, provided that the conditions to be stipulated in said agreement are satisfied, and finally, provided that compliance of other procedures and requirement contemplated by Ecuadorian laws is achieved.

3. Lastly, we would also appreciate your indicating whether the payments contemplated in Article 2.b of Presidential Decree 809 (Official Gazette 197, May 31, 1985) that regulates the application of Article 79 of the Law on Hydrocarbons must be made as a result of the authorization referred to in point 1 above; or, otherwise whether such sums must be paid only when the transfer of rights and obligations in the Block 15 Participation Contract, by OEPC in favour of AOEPC [AEC], becomes effective as described in point 2 above. As repeatedly stated above, the transfer would be made only when several conditions to be agreed in the agreement that would be negotiated are fulfilled, and after the other formalities and requirements contemplated by Ecuadorian Law, including the requirement for formal approval by the Ministry of Mines and Energy, and all other conditions stipulated in the Participation Contract have been met. (Emphasis added)

345.
In the Tribunal's view, the two camps within OEPC had sound and valid reasons for advocating their respective positions. The proponents of Version A saw the Farmout for what it truly was for oilmen, i.e. an "oil for money" deal which allowed OEPC to finance and leverage its continued exploration of Block 15. In effect, AEC would serve as a bank for OEPC. During the "earn-in" phase, OEPC would continue to be solely responsible vis-à-vis PetroEcuador for the performance of all its obligations under the Participation Contract. The future event which mattered and which would require ministerial authorization was the eventual transfer of legal title to AEC of 40% of Block 15 sometime later when AEC, the farmee, had fulfilled its "earn-in" obligations under the Farmout.
346.
The proponents of Version A within OEPC (and AEC) were in good company which included the Claimants' expert on this issue, Mr. Andrew Derman. In his report submitted as part of this proceeding, Mr. Derman concluded, very categorically, that "[t]here was no transfer of legal title or rights and obligations under the Participation Contract by OEPC to AEC under either the Farmout Agreement or the Operating Agreement."17 As he explained later in his report:

Under the Farmout Agreement, if AEC satisfied its payment obligations, AEC had a right to receive from OEPC a portion of OEPC's oil produced under the Participation Contract. While OEPC could not guarantee that AEC would receive legal title, as legal title required approval by the Government of Ecuador, OEPC had a right to dispose of its oil freely, under the Participation Contract, and it could give AEC a portion of such produced oil. AEC essentially financed a portion of OEPC's financial exposure and, like a bank, AEC was repaid and compensated under the pre-agreed terms of the Farmout Agreement. If the Government of Ecuador did not approve the assignment of legal title, AEC would be repaid and compensated for its financing, but it would never secure its position and it would never obtain legal title. Like a bank, AEC's financing would remain uncollateralized.18 (Emphasis added)

347.
On the other hand, the proponents of Version B, probably the lawyers, advocated that it was prudent to ask for "prior approval" for the "earn-in" phase. They had obviously carried out a cursory examination of the agreements at issue. But tellingly, the proponents of Version B were not dogmatic about the requirement of ministerial authorization. As noted earlier, the key paragraph of their draft concluded or else indicate that no such approval is required for such transaction."
348.
Members of the Version A clan prevailed. They did not heed the sound advice of the lawyers and, in doing so, may have acted unwisely and been imprudent. Their proposed course of action may have been risky, as later events confirmed, but, for the reasons set forth in more detail below, the Tribunal fails to see any evidence that their views were driven by bad faith. They were business people, seasoned oilmen, for whom legal niceties were not as important as the business realities of the deal. Their behaviour, unfortunately for the Claimants, was to have dire consequences.
349.
That behaviour, as the record after 23 October 2000 illustrates, led to other instances where OEPC's silence and, in particular, one confusing written message, resulted in serious misunderstandings and understandable confusion within the Ecuadorian Ministry of Energy and Mines.
350.
The saga which has culminated in the present dispute commenced on 24 October 2000. As noted earlier, on that date, senior executives of both OEPC and AEC flew to Quito from the United States and Canada for the purpose of informing Minister Teran of the transaction. The reason for the meeting was not conveyed to the Minister when the appointment was scheduled.
351.

The "script" prepared for that important meeting demonstrates, without the shadow of a doubt, that the proponents of Version A had carried the day and that no authorization would be sought for the "earn-in" phase. The first three numbered paragraphs of this "script" tell the whole story in a nutshell by highlighting that:

1) Oxy and AEC have agreed that AEC will assume a 40% economic interest in Block 15 effective 01 Oct 00.

2) AEC will assume a role as full partner effective 2005, subject to GoE approval.

3) No initial change in the contractual rights and obligations or legal title for Bl15. No change in operational methodology for Petroecuador or the GoE. (Emphasis added)

352.
The first paragraph of the "script" thus, very succinctly, describes the "earn-in" phase, for which no authorization is sought, nor confirmation that authorization is not required. The second paragraph of the "script", again succinctly, describes the subsequent phase by which AEC would become a "full partner" by virtue of acquiring legal title and for which "GoE approval" is required. The third paragraph sets forth the Claimants' view of the world during the "earn-in" phase.
353.
During the meeting of 24 October 2000, Minister Teran was not provided with a copy of the Farmout Agreement which OEPC and AEC had signed five days earlier. While there is no evidence that the Minister asked for a copy of the Agreement, the Tribunal has formed the view that the better course would have been to have handed a copy to the Minister. After all, OEPC and the Government of Ecuador were partners under the Participation Contract. If only on the basis of that contractual relationship, OEPC should have concluded that the better course was to provide a copy of the Farmout Agreement to their partner during that meeting.
354.
On 25 October 2000, Paul MacInnes, President of OEPC, who had lead the OEPC team during the meeting on the previous day wrote to Minister Teran. Due to the importance of this letter, which has already been referred to19, the Tribunal will quote it in full:

In our meeting held on October 24 of this year, we had the opportunity to notify you about the imminent transaction pursuant to which Occidental Exploration and Production Company ("OEPC") intends to transfer to City Investing Company Limited ("CITY") 40% of its economic interests in the Participation Contract for the Exploitation and Additional Exploration of Hydrocarbons in Block 15 (the "Block 15 Contract"). This transfer shall also include the rights of OEPC in the Operating Agreements for Unified Exploitation of the Eden Yuturi and Limoncocha Unified Fields.

After the consummation of this transaction, OEPC shall continue being the only "Contractor" entity under the Block 15 Contract. Once CITY has complied with its obligations contemplated in the transfer agreement, OEPC shall transfer to CITY the legal title corresponding to 40% of its interests in the Block 15 Contract and in the Operating Agreements for Unified Exploitation, subject to the approvals that the Government of Ecuador may require at that time.

This transaction will not negatively affect any of the operations contemplated in the Block 15 Contract or in the Operating Agreements for Unified Exploitation.

We are sure that this transaction will bring significant benefits to the Government of Ecuador and the companies. Therefore, we respectfully request that the Ministry of Energy and Mines confirm as soon as possible, your consent with respect to the aforementioned transfer of economic interests in favor of CITY.

355.
That letter is very confusing and at the source of conflicting evidence both as to events prior to and subsequent to that date.
356.
The Tribunal notes that the letter was written in Spanish but there is no dispute between the parties as to the accuracy of the English translation. The introductory paragraph, which refers to "the imminent transaction", is clearly a reference to the "earn-in" phase. The Tribunal recalls that, whilst the Farmout Agreement was executed on 19 October 2000 to be effective 1 October 2000, the Joint Operating Agreement was dated 31 October 2000 to "have effect from the 1st day of October 2000". In other words, while it may have been strictly correct for OEPC to refer to an "imminent transaction", it would have been more accurate to refer to a transaction (and thus a "transfer") which had taken place 6 days earlier, on 19 October 2000, and which was in effect since 1 October 2000. Indeed, the Tribunal notes that paragraph 1) of the "script" correctly stated that "Oxy and AEC have agreed.." (Emphasis added)
357.
The Tribunal further observes that in the second paragraph of the letter of 25 October 2000, OEPC is clearly referring to the subsequent phase of the Farmout which, it states, is "subject to the approval that the Government of Ecuador may require at that time."
358.
As for the third paragraph of this letter, in the Tribunal's view, it can only be interpreted as referring to the "earn-in" phase. "This transaction" clearly refers to the "imminent transaction" described in the introductory paragraph.
359.
Thus, the first three paragraphs of the follow-up letter of 25 October 2000 are in fact a reiteration, albeit more detailed, of the first three paragraphs of the "script."
360.
By contrast, the very last paragraph of the letter does not fit either the script or the Version A approach. What is perplexing is that, after a few weeks of confusion, as the Tribunal will demonstrate later, as far as OEPC is concerned, it acted vis-à-vis Ecuador as if this last paragraph referred to the subsequent phase of the Farmout, not the "earn-in" phase. In the Tribunal's view, this clearly was not the case. That paragraph is misleading. The Tribunal does not believe that OEPC intended to mislead Minister Teran but that was nevertheless the result of the imprecise wording.
361.
The paragraph at issue, the Tribunal recalls again, reads as follows:

We are sure that this transaction will bring significant benefits to the Government of Ecuador and the companies. Therefore, we respectfully request that the Minister of Energy and Mines confirm as soon as possible, your consent with respect to the aforementioned transfer of economic interests in favour of CITY.

362.
In the second sentence of that fourth paragraph, OEPC can only be seeking from Minister Terán confirmation of his consent to the transfer (" transferencia ") described in the introductory paragraph, to wit the "earn-in" phase. This interpretation, the Tribunal notes, contradicts the evidence of the Claimants' witnesses who maintain that, at the 24 October meeting, Minister Terán, explicitly or implicitly, had agreed with them that no ministerial authorization was required for the "earn-in" phase.
363.
On the other hand, the mutual waiver executed by OEPC and AEC on 31 October 2000 also confirms the prevailing OEPC and AEC view that no government approval was required for the transfer of the 40% economic interest. This waiver is consistent with Version A, the script, and the first three paragraphs of the 25 October letter but not with the fourth paragraph of that letter. It reads as follows: "Of even date herewith, [OEPC] and [AECI] are consummating that certain Farmout Agreement […] pursuant to which OEPC is farming out and transferring to AECI a 40% economic interest in certain properties [etc.]..". Then, in numbered paragraph 1, the mutual waiver of 31 October 2000 further confirms that the parties agree that:

1. Notwithstanding anything to the contrary contained in the Farmout Agreement or in any related document, OEPC and AECI hereby expressly waive satisfaction of any and all requirements for governmental approvals applicable to the transfer by OEPC to AECI of said 40% economic interest in the Farmout Property. The foregoing mutual waiver is not intended, however, and shall not be construed to constitute a waiver by either party hereto of any requirements for governmental approvals applicable to (a) the assignment, transfer or assignments, transfers or conveyances by OEPC and Occidental del Ecuador, Inc. to AECI provided for in that certain letter agreement or even date herewith, by and among OEPC, Occidental del Ecuador, Inc., AECI and AEC OCP Holdings Ltd., relating to the Oleoducto de Crudos Pesados (OCP) Project referred to therein. (Emphasis added)

364.
On 1 November 2000, OPC issued a press release. That news release is wholly inconsistent with the theory of the Respondent that the Claimants wanted to conceal their transaction with AEC. For the oil savvy operators in the Ministry of Energy and Mines and the experienced oil engineers in PetroEcuador familiar with the intricacies of oil exploration and operation by international companies such as OPC, that press release contains the information which they needed to become cognizant of the Farmout, not the minute detail of the actual transaction which would only have been revealed if they could have read the Farmout Agreement and the Joint Operating Agreement, but certainly the general structure of the farmout transaction.20 It read in relevant part as follows:

Occidental Petroleum Corporation (NYSE:OXY) said today that it has agreed to farm out an interest in its operations in Block 15 in Ecuador to Alberta Energy Company Ltd., of Calgary, Canada.

AEC will earn a 40-percent interest in the block and will assume certain capital costs through 2004. Occidental will remain the operator.

365.
An internal memorandum of 8 November 2000 within the Ministry will be considered later in this Award when the Tribunal addresses the issue of whether the sanction of caducidad was proportionate in the circumstances. At this juncture, the Tribunal notes that, in this memorandum, officials of the Ministry - acting on the misleading request set out in the last paragraph of the 25 October 2000 letter - conclude plainly that AEC "has proven that it has technical solvency" and that "there would be no impediment for that assignment of rights" (i.e. the "earn-in" phase). It reads as follows:

SUBJECT: TRANSFER OF 40% OF THE ECONOMIC INTERESTS OF THE BLOCK 15 PARTICIPATION CONTRACT BY OCCIDENTAL EXPLORATION TO CITY INVESTING COMPANY

With regard to letter No. GG-014-00 dated October 25, 2000, in which Occidental reports the transfer of 40% of the economic interests in the Participation Contract for Hydrocarbons Production and Additional Exploration for Block 15, including the OEPC rights in the Unified Production Operating Agreements for the Unified Edén Yuturi and Limoncocha Fields to City Investing Company, I would like to inform you of the following:

City Investing currently has a Participation Contract with the Government in the Tarapoa Block and Fanny-18B and Mariann-4A Unified Fields and is the current operator of the aforementioned Fields. Therefore, it has proven that it has technical solvency, and for this reason, there would be no impediment for that assignment of rights.

366.
The Tribunal notes three important facets in this memorandum: (i) it refers clearly to a "transfer" that has taken place, not a future transfer; (ii) AEC is well known in Ecuador and is considered to have technical solvency (" solvencia técnica "); and (iii) in characterizing the transfer, it speaks of an "assignment of rights" (" cesión de derechos "), the very words used in Clause 16.1 of the Participation Contract.
367.
It is plainly obvious that, within the Ministry, there reigns at that time much confusion and that this confusion is due solely to the careless drafting by OEPC of the last paragraph of the 25 October 2000 letter.
368.
There was a meeting of the Joint Management Committee on 22 November 2000 attended by representatives of Petroproduccion and Occidental. Paul MacInnes reported to the meeting on the "Agreement with AECI." The relevant item in the minutes reads as follows:

2. REPORT ON THE AGREEMENT WITH AECI

Paul MacInnes reports to the Joint Management Committee on the negotiations carried out between OEPC and Alberta Energy Corporation International (AECI), by virtue of which OEPC would sell to AECI 40% of the shares in Block 15, long term. He indicates that a letter was sent to the Ministry of Energy and Mines reporting on these negotiations. This change does not mean a change in OEPC operations, as it is only a stake by AECI in part [of] the capital and OEPC could invest in other projects.

The contractual obligations that OEPC has with the Government would remain unchanged.

369.

The minutes appear to suggest that the Farmout Agreement was in the process of being negotiated ("venderá"). However, the evidence before the Tribunal does not disclose who drafted the minutes which are signed by the participants but not by Paul MacInnes. In any event, in the Tribunal's view, it demonstrates again that, for the Claimants, their transaction with AEC was in the public domain in Ecuador. The transaction was definitely not a secret.

370.
Also on 22 November 2000, Dr. Salgado, the Director of the DNH in the Ministry, wrote a letter to Paul MacInnes, in effect acknowledging receipt of Paul MacInnes' confusing letter of 25 October 2000. Dr. Salgado can be excused for misinterpreting OEPC's request to transfer to AEC 40% of its economic interests and referring instead to a request for "authorization to transfer 40% of the rights it has in Block 15" (i.e. the second phase). Quite naturally, Dr. Salgado then proceeds to ask for "information to guarantee the economic solvency of [AEC]".
371.
On 14 December, Dr. Salgado received a visit from Fernando Albuja of OEPC. It is clear to the Tribunal that OEPC has now realized that its carelessness has caused much confusion within the Ministry. Thus, Fernando Albuja's mission was to put Version A back on the rails.
372.
As the Tribunal notes from the contemporaneous report of Fernando Albuja to Paul MacInnes following that meeting, the last paragraph of the 25 October letter 2000 is now stated to be "a notice of the future transaction". As the Tribunal has already found, this is clearly not what was written in the 25 October 2000 letter. But, the views of clan A, as expressed in the script that no authorization is required for the "earn-in" phase transfer, prevail again. Only the subsequent phase will require ministerial authorization and there is no outstanding request for approval of the "earn-in" phase. In other words, it was as if the last paragraph of the 25 October 2000 letter was never written.
373.
The Tribunal considers it important to quote in full Fernando Albuja's account of this meeting:

We had a meeting with the DNH regarding the notice of the Minister about the AECI deal. Their initial position was to understand the deal as a current transfer of rights. They explained that they were ready to issue a Ministerial Decree authorizing the transfer. After reviewing with them the terms of our letter they realized that the letter basically contains a notice of the future transaction. The answer from the DNH to our letter will be as an acknowledgement of the notice given to them stating that the corresponding Ministerial Decree will be issued once OEPC request the government to authorize the transfer. Meanwhile OEPC will remain 100% liable for the performance of Block 15 contract. (Emphasis added)

374.
The confusion created by the wording of the last paragraph of the 25 October 2000 letter has thus been cleared up by the Version A proponents and, rightly or wrongly, the conclusion of OEPC that the "earn-in" phase did not require ministerial authorization remains the company mantra, with OEPC and Ecuador, as of this point, now on the same page. For OEPC, it has cleared the air and the Ministry has been informed.
375.
Fully in accordance with the message that he received from Mr. Albuja on 14 December 2000, Dr. Salgado reported to Minister Teran on 12 January 2001 that OEPC intended to assign "in the future" 40% of the rights and obligations for Block 15 and, "when they decide", they "will require the corresponding approval."
376.
And thus, on 17 January 2001, Minister Teran wrote to Paul MacInnes an official letter which brought the exchange between OEPC and the Ministry to an end for the time being. Minister Teran acknowledged that "(i)n the meeting held at the National Directorate of Hydrocarbons, officers from Occidental said that the 40% transfer of rights and obligations previously mentioned would not be implemented at the moment". When the "previously mentioned transfer," was to be "implemented," wrote the Minister, you "must request to this State Ministry the corresponding authorization and the issuance of the Ministerial Decree through which such transfer will be legalized, with the prior payment of the transfer fees and enhancement of the economic conditions of the contract, as it is stipulated in Art. 1 of the Executive Decree 2731, published in the Official Register No. 694, dated May 12, 1995".
377.
The Tribunal notes that the OEPC 2000 mantra was still maintained three years later when the Claimants described the 2000 Farmout Agreement to Moores Rowland. In his letter of 15 March 2004, Paul MacInnes wrote:

In the year 2000, OEPC and AEC Ecuador signed an agreement by means of which, subject to satisfying certain conditions and subject to approvals required by the Ecuadorian Government, they committed themselves to transfer in the future the legal title corresponding to 40% interest in the Contract for Block 15 and the Operational Agreements for Unified Exploitation.

378.
Although there is no specific reference in that letter to the transfer to AEC of a 40% economic interest in 2000, the letter is consistent with the conclusion reached by OEPC and AEC in October 2000 when they visited Minister Teran that this was a two-phase transaction and that the first phase did not require ministerial authorization.
379.
The Tribunal finds in the record another statement by OEPC with the same mantra in the letter sent to PetroEcuador in July 2004 in which it requested approval of the transfer of legal title to AEC in accordance with Article 79 of the Hydrocarbons Law and Article 46 of the Regulation for the Application of Law 44, and as contemplated by Clause 16.1 of the Participation Contract." The first phase is not mentioned explicitly because, in October 2000, OEPC and AEC had reached the conclusion that it did not require ministerial authorization:

In the year 2000, Occidental Exploration and Production Company ("OEPC") and AEC Ecuador LDT (formerly known as City Investing Company Limited) ("AEC" Ecuador) entered into an agreement pursuant to which, subject to satisfying certain conditions and subject to obtaining required government approvals, the parties agreed to convey to AEC Ecuador in the future legal title to a 40% interest in the Block 15 Participation Contract […].

380.
The Tribunal reiterates its conclusion. As the Tribunal's analysis of the Farmout Agreements earlier in this Award has demonstrated, the Claimants' interpretation of the Farmout Agreement was wrong. However, the Tribunal does not consider, as the Respondent has argued, that it was made in bad faith. The Claimants' failure to seek ministerial authorization was a mistake, a serious mistake, but it was not done in bad faith. Should Paul MacInnes and his colleagues, during their visit with Minister Terán on 24 October 2000, have given him a copy of the Farmout Agreement and the Joint Operating Agreement so that his advisors could have formed their own opinion about the true nature of the transaction? As stated earlier, the Tribunal has no hesitation in answering its own question in the affirmative. OEPC and AEC were negligent in not doing so. But again, the Tribunal does not find that failure to do so amounted to bad faith. They may have been negligent but there was no intention on their part to mislead. They were simply convinced that they were right and acted accordingly without seeking to mislead the Ecuadorian government. In a number of instances, in the fall of 2000, they revealed publicly in Ecuador that they had entered into a farmout transaction with AEC. When they realized that their behaviour, and in particular the last paragraph of their 25 October letter, created confusion within the Ministry, they tried to dissipate that confusion. Unfortunately, the confusion persisted until the spring of 2004 when officials of the Respondent sighted and analysed the Farmout Agreements.
381.
In conclusion, the Tribunal finds, based on the above, that OEPC, by failing to secure the required ministerial authorization, breached Clause 16.1 of the Participation Contract and was guilty of an actionable violation of Article 74.11 of the HCL.
382.
The Tribunal will now address the Claimants' allegation that the sanction imposed by the Respondent for the failure to secure the required authorization for the transfer of rights under the Participation Contract, namely the Caducidad Decree, was inconsistent with the Treaty (Article II.3(a) and Article III.1) and Ecuadorian law because it was, in the circumstances, manifestly disproportionate.
383.
However, before turning to the proportionality of the Caducidad Decree, the Tribunal recalls that the Claimants have also alleged that the Caducidad Decree was inconsistent with the Treaty and Ecuadorian law because, inter alia, it frustrated their legitimate expectations in the circumstances. Having concluded above that OEPC's failure to secure the required authorization on the part of the Ecuadorian authorities in October 2000, while not amounting to bad faith, was negligent, the Tribunal considers that the Claimants cannot be found to have had a legitimate expectation that the Minister would not exercise his discretion and impose caducidad. The failure to secure the required authorization meant that OEPC breached Clause 16.1 of the Participation Contract and was guilty of an actionable violation of Article 74.11 of the HCL which, as one option, expressly allowed the Minister to declare the caducidad of the Participation Contract and the Joint Operating Agreements. For this reason, the Claimants' allegation that the Caducidad Decree frustrated their legitimate expectations is rejected.

3. The Proportionality of the Sanction for the Unauthorized Transfer of Rights under the Participation Contract

(a) Preliminary Observations

384.
The Tribunal has found that the Farmout Agreement and the Joint Operating Agreement operated to effect a transfer of rights under the Participation Contract from OEPC to AEC. The Tribunal has also found that this transfer required authorization on the part of the Ecuadorian authorities, that this authorization was not sought, but that OEPC's failure to secure such authorization in October 2000, while imprudent and ill advised, did not amount to bad faith.
385.
The Tribunal recalls that the issue of the transfer of rights under the Participation Contract by OEPC to AEC resurfaced in 2004 in the context of what has been referred to as the Moores Rowland audit, described in some detail earlier in this Award. Ultimately, Moores Rowland issued its audit report on 14 July 2004, noting therein that the assignment of rights and obligations contemplated in the Farmout was made contingent on future events and that the assignment "might or might not happen" at the end of the four years during which the conditions were to be satisfied. The audit report recommended to the DNH that OEPC seek government authorization for the assignment during that year, assuming the assignment conditions were satisfied, and that the required ministerial approval be granted to OEPC in order to properly register the assignment.
386.
As also recalled earlier in this Award, AEC had in fact made all payments due under the Farmout a few months earlier in February 2004. The day after Moores Rowland issued its audit report, on 15 July 2004, OEPC wrote to the then-Minister of Energy and Mines, Eduardo López Robayo, "request[ing] the Ministry to approve the transfer by OEPC to AEC Ecuador of legal title to a 40% interest" in Block 15, as contemplated under the Farmout. In making this request, OEPC referred to its letter of 25 October 2000, as well as Minister Terán's response of 17 January 2001.
387.