Andes Petroleum Ecuador Ltd. v. Occidental Exploration and Production Company

Background

In 1999, Occidental entered into an agreement with PetroEcuador to develop hydrocarbons in Block 15. In 2000, Occidental and Andes signed a Farmout Agreement and a Joint Operating Agreement under which Occidental agreed to assign Andes a 40% interest in its exploration and exploitation rights, subject to Ecuadorian government approval.

After Ecuador terminated Occidental’s Block 15 rights in May 2006, Occidental began an arbitration proceeding against Ecuador before the International Centre for Settlement of Investment Disputes. Occidental later settled with Ecuador for approximately $980 million and received a release concerning certain disputed tax and labor amounts.

Andes relied on paragraph 2(g) of a 2006 Letter Agreement. That provision stated that if Occidental received a monetary award from Ecuador resulting from Ecuador’s actions concerning Block 15, Andes would receive 40% of the net amount after specified costs and expenses were paid or reimbursed. Andes demanded 40% of the settlement amount, but Occidental rejected the demand. Andes then commenced arbitration.

The three-person arbitration tribunal unanimously issued an award on March 26, 2021. It found that Occidental breached paragraph 2(g) by refusing to pay Andes 40% of the settlement amount and awarded Andes $391,879,747, plus interest and costs. Andes petitioned the court to confirm the award, while Occidental moved to vacate it under Sections 10(a)(1) through 10(a)(4) of the Federal Arbitration Act.

Legal standard

The Federal Arbitration Act generally requires a court to confirm an arbitration award unless the award is vacated, modified, or corrected under the Act. Judicial review is highly limited, and the party seeking vacatur bears the burden of proof. The court explained that the showing required to prevent confirmation is very demanding.

Analysis

Fraud or undue means. Occidental argued that the arbitrator it had appointed, Robert Smit, had incompletely disclosed his professional relationship with Andes’s lead counsel, Laurence Shore, and that Andes and the related arbitrators had failed to disclose relevant information. The court assumed, for purposes of analysis, that the incomplete disclosures could constitute fraudulent activity. It nevertheless held that Occidental could have discovered the relevant appointments through publicly available information before the award was issued. The court therefore rejected vacatur based on fraud.

Evident partiality. Occidental argued that Smit was evidently partial because he and Shore served concurrently on two arbitration panels and therefore could have engaged in improper communications or collaborative decisionmaking. The court stated that the Federal Arbitration Act does not prohibit all personal or business relationships involving arbitrators. It held that concurrent service on two panels, without more, did not establish a material conflict or require a reasonable person to conclude that Smit was partial to Andes. The court denied vacatur on this ground.

Arbitrator misconduct. Occidental argued that Smit’s failure to disclose his relationship with Shore deprived it of contractual disclosure rights and the opportunity to seek Smit’s replacement. The court held that misconduct under Section 10(a)(3) requires a denial of fundamental fairness, such as grossly and totally blocking a party’s right to be heard. Occidental did not identify any part of the arbitration in which it was prevented from presenting evidence or otherwise denied a fair hearing. The court concluded that Smit’s failure to disclose the limited relationship did not justify vacating the award.

Exceeding the arbitrator’s authority. Occidental argued that Smit exceeded his authority by failing to disclose the relationship. The court emphasized that review under Section 10(a)(4) is especially narrow and does not permit vacatur merely because an arbitrator made an error, even a serious one. Because the tribunal decided an issue within the scope of the parties’ agreement and provided a legally permissible justification for its result, the court denied vacatur on this ground as well.

Disposition

Judge Alvin K. Hellerstein granted Andes’s petition to confirm the arbitration award and denied Occidental’s motion to vacate the award. The court directed the Clerk to terminate the motions and enter judgment for Andes plus costs and interest.