The opinion of the court was delivered by: Sand, J.,
Before this Court is a hearing pursuant to Rule 44.1 of the Federal Rules of Civil Procedure to determine issues of Ecuadorian law prior to ruling on plaintiffs' motion for summary judgment entering: (a) judgment on plaintiffs' claims; (b) dismissing defendants' counterclaims; (c) permanently enjoining and staying defendants from continuing any arbitration proceedings in this matter; and (d) awarding plaintiffs such other and further relief as the Court deems just, as well as defendant's motion for summary judgment dismissing plaintiff's claims for a permanent injunction of arbitration. This Rule 44.1 hearing was ordered by the Court to determine whether an Ecuadorian court presented with the 1965 Joint Operating Agreement ("JOA") between Gulf Oil Company ("Gulf") and the defendants' predecessors would find, that plaintiff PetroEcuador's predecessor Compania Estatal Petrolera Ecuatoriana ("CEPE") became bound by the JOA in 1974 after taking over Gulf Oil's ownership interest.
Fed R. Civ. P. 44.1 Power
Federal Rule of Civil Procedure 44.1 governs how foreign law is determined in federal court. It provides:
A party who intends to raise an issue concerning the law of a foreign country shall give notice by pleadings or other reasonable written notice. The court, in determining foreign law, may consider any relevant material or source, including testimony, whether or not submitted by a party or admissible under the Federal Rules of Evidence. The court's determination shall be treated as a ruling on a question of law.
Fed. R. Civ. P. 44.1. Rule 44.1 was enacted in 1966. Prior to its enactment foreign law was a question of fact; now it is a question of law, which means that it may be determined at the summary judgment stage of litigation. See Louise Ellen Teitz, The Use of Evidence in Admiralty Proceedings, 34. J. Mar. L. & Com. 97, 104 (Jan. 2003) (discussing the Federal Rules of Civil Procedure and methods of proof of foreign law).
Rule 44.1 places the burden on the party raising issues of foreign law to give "notice by pleadings or other reasonable written notice." "Since in Rule 44.1 there is no form specified for the notice, federal courts construe the requirement liberally." Teitz, 34. J. Mar. L. & Com. at 106. Both parties have over the course of this litigation made clear the need to determine what was permitted under Ecuadorian law in 1974 before the Court endeavored to undertake any analysis whether PetroEcuador could be bound to the JOA under the United States federal laws of estoppel. See The Republic of Ecuador v. ChevronTexaco Corp., 376 F. Supp. 2d 334 (S.D.N.Y. 2005) (hereinafter ROE I); The Republic of Ecuador v. ChevronTexaco Corp., 426 F. Supp. 2d 159 (S.D.N.Y. 2006) (hereinafter ROE II).
The advisory committee notes on Rule 44.1 suggest that courts are allowed great leeway in making a foreign law determination and provide that traditional evidentiary standards need not apply. Fed. R. Civ. P. 44.1, advisory notes ("The new rule permits consideration by the court of any relevant material, including testimony, without regard to its admissibility under Rule 43."). To this end, the Court undertook to determine pertinent Ecuadorian law at a foreign law hearing, which commenced on May 21, 2007 and concluded on May 24, 2007. The Court permitted each party ample time to brief the issues and allowed each party to present voluminous expert testimony on the topic and to cross examine the opposing party's experts.
Both the Court's determination of Ecuadorian law and its partial ruling on the motion for summary judgment are set forth below; a portion of the summary judgment determination is set aside for the parties to reevaluate their posture.
This Court and other courts in the Second Circuit have, at multiple times and in various incarnations over the past 14 years, dealt with the underlying facts of this case. They are set forth in greater detail in other opinions rendered by this Court, see ROE I; ROE II, as well as by other courts in the Second Circuit when faced with a suit by a group of indigenous people in the Republic of Ecuador against the defendants in this case. See Aguinda v. Texaco, Inc., 303 F.3d 470 (2d Cir. 2002); Jota v. Texaco, Inc., 157 F.3d 153 (2d Cir. 1998)). A brief background of the case follows, as well as the facts pertinent to the issue presented here.
In 1965 the government of Ecuador granted an oil concession (the "Napo concession") to Gulf and the Texaco Petroleum Company ("TexPet"). Pursuant to the Napo concession Gulf and TexPet signed a Joint Operating Agreement (JOA) in 1965 for the drilling of the concession. Both Gulf and TexPet were American companies domiciled in Ecuador, and represented by local Ecuadorian counsel; however, the JOA was signed in Florida. The JOA provided for arbitration to be conducted pursuant to AAA rules in New York, and is the basis of Chevron's alleged right to engage plaintiffs in arbitration of the 1995 settlement agreement provisions.
In 1972 Ecuador's military assumed control of the government. In an effort to nationalize the state's oil industry, the government issued Supreme Decree No. 430 "which, inter alia, required TexPet and Gulf to agree to new oil concession contracts with the Republic and to relinquish a substantial percentage of Napo concession lands." ROE I, 376 F. Supp. 2d at 339 (internal citations omitted). In 1974, 25% of Gulf's interest in the drilling of Ecuadorian oil was taken over by CEPE pursuant to a government edict following Supreme Decree No. 430, referred to by the parties as the "1974 Acta." "The 1974 Acta did not itself contain a clause providing for arbitration; it did, however, contain a clause stating that 'the totality of the activities that will develop in the Joint Operation will be regulated by an operating agreement entered into by the parties,' the effect of which the parties dispute."*fn1 ROE I, 376 F. Supp. 2d at 340. The parties agree that neither CEPE nor PetroEcuador ever signed the 1965 JOA at this point, or at any other point going forward.*fn2 Therefore PetroEcuador can only be held to the terms of the JOA through the operation of law.
For the next three years the parties drilled the fields, but by 1976 Gulf decided to sell its interest in the newest concession to CEPE. CEPE bought out the remainder of Gulf's interest on May 27, 1977. There was no mention of the JOA in CEPE's agreement to take over Gulf's interest. (See Pl.'s Mem. of Law in Supp. of Mot. for Summ. J. at 10.)
From 1977 through 1991, when a new JOA was agreed upon, Texaco and PetroEcuador operated the oil fields in conjunction with each other, with Texaco serving as the operator.*fn3 The parties attempted, but ultimately were unable until 1991, to agree upon a new JOA at various points during this interim operating period. At the start of negotiations for a new JOA in 1974, Chevron included provisions requiring arbitration, which were removed at the behest of PetroEcuador. (Id. at 7.) Multiple drafts of new JOA's were exchanged by the parties over the 17 year interim period. (Id.) The question before the Court is whether an Ecuadorian Court would find that CEPE had assumed Gulf's rights and obligations under the JOA in 1974 so that arbitration before the American Arbitration Association ("AAA") in New York sought in 2004 would be mandated.
The present dispute finds its origin in a 1993 lawsuit instituted in the Southern District of New York by a group of indigenous people in Ecuador who sued defendants ChevronTexaco and Texaco Petroleum Company (referred to herein as "Chevron," except where noted) to compel the cleanup of their community's environmental resources which they allege were damaged by waste remaining after years of oil drilling on the land. After years of litigation in the American federal courts, the case was dismissed at Chevron's request on the grounds of forum non conveniens by the Second Circuit, with the caveat that Chevron consent to jurisdiction for a renewed suit in Ecuador. Aguinda v. Texaco, Inc., 303 F.3d 470 (2d Cir. 2002). The first attempt by indigenous Ecuadorian plaintiffs to sue Chevron is referred to by the parties as the "Aguinda" litigation cases.*fn4
In 2003 the indigenous Ecuadorian plaintiffs renewed the Aguinda litigation seeking the same relief as that sought earlier, however this time from the courts of Ecuador. This renewed action is referred to by the parties as the "Lago Agrio" action.
While the Aguinda litigation was ongoing in this district the current plaintiffs and defendants signed a settlement in 1995 ("1995 Settlement") wherein TexPet agreed to perform certain environmental cleanup in exchange for a release of claims by Ecuador and PetroEcuador; in 1998 the 1995 Settlement was declared to be fully performed and concluded and the Government and PetroEcuador released Chevron and any related companies from "from any liability and claims by the Government of the Republic of Ecuador, PetroEcuador and its Affiliates, for items related to the obligations assumed by TEXPET in" the 1995 Settlement. See ROE I, 376 F. Supp. 2d at 341-42 (internal citations omitted).*fn5
Procedural History before this Court
The essence of the case at hand comes down to who will pay for the costs of any environmental cleanup which may be ordered by an Ecuadorian court at the behest of the Lago Agrio plaintiffs: defendants or Ecuador and its state-owned oil company PetroEcuador.
On June 11, 2004, to determine who would bear the burden for the cleanup sought in the Lago Agrio litigation, Chevron instituted arbitration proceedings with the AAA seeking indemnification of any adverse judgments and associated costs of litigating the Lago Agrio case, as well as contractual damages for violating the terms of the 1965 JOA.
On October 15, 2004 plaintiffs commenced suit in New York Supreme Court seeking to stay permanently the arbitration proceeding before the AAA; on October 22, 2004 defendants removed the case to the Southern District of New York. Chevron counterclaimed alleging a breach of contract by Ecuador for failing to indemnify it as it allegedly contracted to do pursuant to the 1995 Settlement.
In ROE I, this Court denied Ecuador's motion for summary judgment. Chevron claimed at the time, and continues to claim today, that PetroEcuador is estopped from denying that it is bound to the JOA because it acted in a manner consistent with the JOA in the day to day operation of the concession and received benefits from operation during the years following 1974. The Court found that application of federal common law to the question of whether Ecuador, a nonsignatory to the original arbitration agreement was bound to arbitrate this dispute raised genuine issues of material fact as to whether Ecuador could be bound through principles of estoppel to the 1965 JOA. The Court wrote:
Under federal common law, the Second Circuit "has recognized five theories for binding nonsignatories to arbitration agreements: 1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel." Thomson-CSF, S.A. v. American Arbitration Association, 64 F.3d 773, 776 (2d Cir. 1995). "[A] willing signatory (such as [TexPet]) seeking to arbitrate with a non-signatory that is unwilling (such as [PetroEcuador]) must establish at least one of the five theories described in Thomson-CSF." Merrill Lynch Inv. Managers, 337 F.3d [125,] at 131 [(2d Cir 2003)].
Of the five Thomson-CSF theories, the most likely to apply in this case is estoppel. "A party is estopped from denying its obligation to arbitrate when it receives [**61] a 'direct benefit' from a contract containing an arbitration clause." American Bureau of Shipping v. Tencara Shipyard S.P.A., 170 F.3d 349, 353 (2d Cir. 1999) (citing Thomson-CSF, 64 F.3d at 778-79). Direct benefits are those "flowing directly from the agreement," while "the benefit derived from an agreement is indirect where the nonsignatory exploits the contractual relation of parties to an agreement, but does not exploit (and thereby assume) the agreement itself." MAG Portfolio Consultant, GMBH, v. Merlin Biomed Group LLC, 268 F.3d 58, 61 (2d Cir. 2001). "To prevail, then, [Defendants] must show that [PetroEcuador] 'knowingly exploited' the ... contract and thereby received a direct benefit from the contract." Id. at 62 (quoting Thomson-CSF, 64 F.3d at 778).
ROE I, 376 F. Supp. 2d at 356. The Court then examined the applicable evidence and determined that there was a genuine issue as to the material fact of whether Ecuador was in fact estopped from arguing that it could not be bound to the 1965 JOA.*fn6
The Court then held a hearing to determine whether there was a conflict of law between the laws of Ecuador and New York law in relation to the 1995 settlement which was raised in defendant's counterclaim and subject to a motion to dismiss held over from ROE I. Finding no conflict and therefore applying New York law to the breach of contract claim, the Court stated "that any assessment of the intent of the parties in agreeing to the 1995 and 1998 releases must take into consideration the Ecuadorian law at the time of the releases and the Ecuadorian context in which the parties were acting." ROE II, 426 F. Supp. 2d at 164.
Plaintiffs now claim that Ecuadorian law precludes any reasonable belief by Chevron that CEPE agreed to the JOA; this contention, if true, would in effect end the question of arbitrability in this case and make any analysis of the facts of this case under the federal laws of estoppel not needed. Ecuador and PetroEcuador allege that the terms of the 1965 JOA cannot bind them to arbitration in New York because they were not signatories to the original contract and could not become a party to it, under (1) Ecuadorian government contract law, (2) the Ecuadorian constitution then in effect, or (3) can by their course of conduct be found to have assumed the terms of the JOA. Chevron disagrees as to the result under Ecuadorian law in all three areas.
While the Court previously stated that federal principles of the American law of estoppel would apply, it is impossible to properly analyze an estoppel claim in American law without reference to the underlying Ecuadorian law because estoppel, particularly when sought against a governmental ...