A Case Study in Multinational Corporate Accountability: Ecuador’s Indigenous People’s Struggle for Redress

By Atty. Gerasol H. Valencia

Multinational corporations often seek out developing countries (host countries) with a large workforce and an abundance of natural resources for foreign direct investments while maintaining the parent company in a developed country (home country). Incentives created by countries seeking to attract foreign direct investment from multinationals often include regulatory structures “sympathetic to foreign investment,” because foreign investments generate jobs, economic activity and development for the host country as was demonstrated in the Republic of Ecuador’s complicity in Texaco’s oil operations

The eastern half of the Ecuadorian Amazon known as the Oriente is one of the richest bioregions on the planet and a rich source of oil that has been exploited by multinational oil companies for thirty years. Opil extraction in the Amazon has led to contamination of the waters and land, deforestation and resulted in sickness in indigenous communities, threatening some communities with cultural extinction. The jungle of Ecuador will be extinguished in its entirety within forty years at the present rate of deforestation, however, the since oil extracted and sold in the global market is the foundation of Ecuador’s economy, the same is being promoted by the Ecuadorian government as the key to development. Despite initial opposition by the Ecudorian government, indigenous peoples of Ecuador formed grassroots resistance movements—educating local communities against exploitation, which led citizens of Ecuador and Peru to file two putative class actions against Texaco (now ChevronTexaco).

This case study considers generally the barriers encountered by plaintiffs in attempting to gain access to redress fro wrongs committed by multinationals in foreign jurisdictions and proposes solutions for improving means of redress as a mechanism for demanding multinational accountability in an international context.

Texaco’s Operations in Ecuador
In 1964, the Ecuadorian government invited Texaco (a multinational corporation domiciled in the United States) to develop the country’s first oil field in the Oriente. Thus, Texaco’s Ecuadorian subsidiary, Texaco Petroleum company (TexPet) commenced exploration. In 1967, Texaco found oil near the Columbian border, an unspoiled jungle region in Ecuador that was, at that time, inhabited by indigenous tribes and missionaries. Texaco began drilling in the Oriente as part of a consortium in which Gulf Oil Corporation (Gulf) and Texaco owned equal shares and in which the Ecuadorian Government-owned Petro Ecuador acquired a twenty-five percent share in 1974. PetroEcuador became the majority stakeholder in 1976 when it acquired Gulf’s interests. By 1980, in addition to drilling hundreds of wells, the consortium had constructed the 312-mile trans-Ecuadorian pipeline traversing the Andes and access roads throughout the jungle. TexPet operated the oil pipeline and handled all drilling operations until PetroEcuador assumed responsibility for the pipeline in 1989 and drilling operations in 1990

Between 1971 and 1992 when Texaco ceased operations in Ecuador, Texaco had drilled 339 wells in over a one million acre concession and extracted roughly 1.4 billion barrels of crude oil from the Amazon. Texaco’s operations generated more than 3.2 millions of gallons of waste each day while accidental spills from the pipeline released an estimated 16.8 million gallons of crude into the Amazon River—all discharged without prior treatment or follow-up monitoring. The drilling mud such as those dumped in unlined pits near the wells in the Oriente and the “produced water,” a brine that was dumped into nearby streams, can contain “toxic levels of benzene,” a known carcinogen, and lead which can impede mental development in children and cause the devastation of streams, rivers and wetland in the Amazon basin thereby affecting both Ecuador and Peru’s indigenous inhabitants.

In response to a request from Ecuador’s Minister of Energy and Mines for an environmental audit of the oil fields in 1994, Texaco asserted that during the company’s years of operation, they complied with all laws and regulations and that the company’s standard operating practices were beyond the environmental laws and regulations of countries around the globe. However, in sharp contrast to Texaco’s practice, large operators from the United States had mostly abandoned the use of unlined dirt pits to dispose of drilling mud by the mid-1980s due to more stringent disposal regulations for oil waste prompted by growing health and environmental impact concerns. According to interviews and documents produced during discovery in the case filed in the United States, Texaco dumped wastewater directly into streams and the jungle instead of using disposal methods that are safer for the environment and public health that became common in the United States during the 1970s and 1980s. Oil company officials regarded those methods as too expensive and not cost-effective in Ecuador.

Health and Cultural Impacts
Nearly 2.5 million acres of pristine rainforest were opened up to land speculation, colonization, deforestation, ranching, logging, and agri-industry as a result of Texaco’s access roads forcing indigenous Tetetes off their land and dispossessing the indigenous Cofan of their traditional territory. In addition to being displaced, the deforestation and pollution have severely degraded the indigenous peoples hunting and fishing territories leading to malnutrition and pushing them to the brink of extinction. Furthermore, exposure to outside influences destabilized indigenous communities exposing to epidemics of foreign diseases, prostitution and alcoholism.

Texaco’s Economic and Political Sway on the Republic of Ecuador
Texaco used its immense economic resources and political ties to maintain its operations with little to no government oversight or regulation. Texaco used its economic superiority to manipulate its often-strained relations with the Ecuadorian government. Texaco issued multimillion-dollar loans with generous terms to the economically-challenged Ecuadorian government. Economic forces weighed heavily in Texaco’s favor as a means of manipulating environmental regulation of its operations and in turn, the Republic of Ecuador used the pretext of an improved economy to justify the exploitation of its own people and their habitats.

The Ecuadorian government’s regular budget cuts for environmental programs are representative of their lack of concern for the environmental impact of Texaco’s drilling operations. Government-owned PetroEcuador, a partner in the consortium, played a supporting role in the devastation of the Amazonian Oriente region. The state oil company erased the budget line for environmental operations to save money. Texaco could conduct its operations in accordance with any level of compliance it felt appropriate or necessary.

In March 1995, after two lawsuits were filed in the United States’ federal court against Texaco for pollution caused in the Oriente and Peruvian lands downstream, Texaco negotiated an Agreement for Environmental Reparations with the Ecuadorian government which resulted in a $40 million dollar clean-up in exchange for a Final Release of Claims and Delivery of Equipment and a settlement with municipalities in the drilling region releasing Texaco from any future obligations or liabilities. Remediation by Texaco prior to its departure from Ecuador, although strongly criticized by plaintiffs as inadequate, was heavily relied upon by Texaco to excuse it from over twenty years of social and environmental irresponsibility.

After a merger in 2001, Texaco became ChevronTexaco, the second largest energy company in the world. Although it did not deny dumping production wastes into the Amazonian environment, the company denied responsibility for any environmental damage based on their position as a minority partner and their claim that operations were controlled by the state-owned oil company PetroEcuador and approved by the Ecuadorian government. However, affidavits by plaintiffs and witnesses indicate that the most important contract for field operations were approved and signed in the United States while ChevronTexaco company policy demanded that authorization be sought regarding annual budgets and expenditures.

Cases filed in the United States: Aguinda and Jota v. Texaco
A putative class action suit against Texaco was filed in November 1993 in a federal court in New York by a team of lawyers based in the United States on behalf of the plaintiffs composed of mestizo settlers, members fo the Cofan, Siona and Secoya indigenous communities of the Sucumbios and Orellana provinces in the north of the Oriente. The plaintiffs chose New York as it was the home of Texaco’s international headquarters where many of the decisions regarding oil operations in Ecuador were made. Fearing that the suit against Texaco would deter future international investment in Ecuador’s oil development, the Ecuadorian government initially opposed the suit. In 1993, Texaco moved for dismissal on grounds of failure to join the Republic of Ecuador, international comity and forum non conveniens (inconvenient forum). On the other hand, Ecuador regarded the suit as an affront to Ecuador’s national sovereignty. However, Judge Broderick issued a decision upholding the plaintiffs’ claim that Texaco’s dumping in Ecuador could be in violation of international law.

Plaintiffs alleged that they would suffer personal injuries and property damage as a result of negligent or otherwise improper oil piping and waste disposal practices. They based their claims on theories of negligence, public and private nuisance, strict liability, medical monitoring, trespass, civil conspiracy, and the Alien Tort Claims Act (ATCA).

The death of Judge Broderick in 1995 changed the course of the Aguinda I suit subsequently assigned to Judge Jed Rakoff who found that the previous court afforded the plaintiffs “unusual leeway.”

First United States District Court Decision
In November 1996, Judge Rakoff granted Texaco’s motion and dismissed the Aguida complaint on grounds of international comity, forum non conveniens and failure to join indispensable parties and proclaimed Ecuador’s courts as a more convenient forum for the litigation. In response to the court’s declaration that the Sovereign Immunities Act barred the court’s assertion of jurisdiction over either Ecuadorian entity, plaintiffs simultaneously filed a Motion to Reconsider the court’s dismissal which was denied in the decision to dismiss.

First Appeal in the United States
In October 1998, the Second Circuit Court of Appeals vacated and remanded Judge Rakoff’s decision instructing the District Court to independently re-weigh the relevant factors of the dismissal of the case on the grounds of forum non conveniens and international comity.

Following the Court of Appeal’s decision, the citizens of Ecuador and Peru moved for inhibition by Judge Rakoff on the ground that the judge’s attendance at an expense-paid seminar sponsored by organizations that received funding from Texaco after his initial dismissal of the case raised the appearance of impropriety. After Judge Rakoff denied the motion, plaintiffs sought mandamus but Court of Appeals Circuit Judge Winter denied the petition finding that Judge Rakoff did not abuse his discretion in denying the plaintiff’s motion.

The United States’ District Court’s Decision on Remand
In the District Court case on remand, Ecuador’s Ambassador to the United States informed the Court that the Republic of Ecuador was not willing under any circumstance to waive its sovereign immunity to be subject to courts in the United States. Thereafter, Texaco renewed its Motion to Dismiss after consenting to personal jurisdiction in Peru and Ecuador and stipulating that it would waive its defenses under the statute of limitations on the appeal period in order to allow the plaintiffs to file another suit in Ecuador. In a decision dated May 2001, Judge Rakoff again granted Texaco’s motion to dismiss concluding that Texaco satisfied the burden of demonstrating an adequate alternative forum rejecting plaintiffs’ assertions that public interest factors should be analyzed under the ATCA Law of Nations Test. Judge Rakoff said that the record overwhelmingly establishes that the case had everything to do with Ecuador and nothing to do with the United States.

Final Appeal in the United States
Attorneys for the Ecuadorian plaintiffs disagreed that Ecuadorian courts exercise the necessary independence from military involvement in civil affairs. Citing corruption and bureaucratic obstruction in the Ecuadorian court system, plaintiffs’ attorneys claimed overwhelming impediments. The 1999 State Report for Ecuador concluded that Ecuador’s legal system was inefficient and corrupt. Some of the other obstacles cited were the inadequacies of the Ecuadorian courts, inability to compel witness testimony, prohibition of class actions, and exorbitant court fees.

The United States’ Court of Appeals for the 2nd Circuit considered many of the obstacles but ultimately affirmed the District Court’s dismissal of the suit on the ground of forum non conveniens with an extension of time for filing the suit in Ecuador. The relative ease of access to sources of proof favors proceedings in Ecuador. All plaintiffs, as well as members of their putative classes live in Ecuador or Peru. Plaintiffs sustained their injuries in Ecuador and Peru and their relevant medical and property records are located there. Also located in Ecuador are the records of decisions taken by the consortium, along with evidence of Texaco’s defenses implicating PetroEcuador and the Republic of Ecuador. By contrast, plaintiffs failed to establish that the parent Texaco made decisions regarding oil operations in Ecuador or that evidence of such decisions is located in the United States. Thus, the theory of forum non conveniens served as a mechanism to protect the multinational from being made liable by courts in the United States for wrongs committed by its subsidiaries in a foreign jurisdiction.

Ecuador Case: Republic of Ecuador and PetroEcuador v. Texaco
The case filed in Ecuador following the United States’ Second Circuit Court Appeals’ affirmation of the District Court’s dismissal on grounds of forum non conveniens represented the first time that Texaco or any other oil company in the United States was forced to face trial in an Ecuadorian court. The case was heard in a small courthouse in Lago, Agrio, a remote town in the heart of Ecuador’s oil operations.

The trial’s first phase focused on testimony and evidence including that of the former Minister of Ecuador’s Ministry of Mines who testified that “a Texaco subsidiary knowingly used primitive waste disposal techniques in the 1970s and 1980s.” Wtinesses, during questioning, told the Judge that “Texaco designed and manged the oil fields that fouled the region with vast quantities of oily waste” and the “Texaco knew that its waste pits were not well-constructed and were polluting the rain forest.”

ChevronTexaco did not present any witness during the first phase. However, thousands of pages of previously confidential memos, studies and internal documents that revealed the inner workings of Texaco and its majority partner, PetroEcuador were released. It included an internal Texaco letter which indicated that the oil company rejected the option of lining its earthen waste pits to protect the environment since it is too expensive. The letter written in 1980 by a Texaco manger stated that “[t]he current unlined pits are necessary for the efficient and economical operation of our drilling operations as the total cost of eliminating the old pits and lining the new pits would be $4,197,958… It is recommended that the pits neither be lined nor filled.”

Texaco flatly denied any wrongdoing and further maintained that the use of unlined pits was legal in Ecuador and a standard practice in regions with clay soil such as the Amazon. ChevronTexaco also disputed the claims of damages to health. According to the company’s spokesman, “over ten years of litigation have yet to produce any credible and substantiated scientific information.” ChevronTexaco further asserted that Ecuador’s national oil company set the policy for the venture while the drilling met all of the country’s environmental requirements. It interpreted Ecuador’s laws to allow dumping of wastes versus the more expensive process mandated in the United State of re-injecting the oil-contaminated water back into the well.

In the second phase of the trial, the judge will conduct a personal investigation in the field and may request the parties to return for further questioning. In addition to the site visits, the court has yet to review over 5,000 pages fo documents obtained through discovery in the United States.

Implications of the Ecuadorian Trial
It is unclear how the Ecuadorian court would rule on the lawsuit in view of Ecuador’s bid to attract foreign investment to continue Ecuador’s oil development. Reportedly, the Ecuadorian government has not taken any position on the lawsuit but noted that the people in the region have health problems and have suffered for more than ten years.

From 1977, when PetroEcuador acquired a sixty-two and one-half percent share in the Texaco consortium to the early 1990s when it took over the drilling and pipeline operations, it continued to disregard the environment. Although stricter regulations were passed in 1992 requiring re-injection of production waste, lining of waste pits and restricting access by new settlers, these requirements have not been enforced. Implementing regulations are underdeveloped while enforcement mechanisms are limited due to Ecuador’s dependence on the capital and technology of multinational corporations.

Rights of Indigenous Peoples
International law protects the right of all to shelter, livelihood and a safe environment. International laws ratified by Ecuador, and the new Ecuadorian constitution, establish rights of indigenous to peoples to have a say in state decisions and projects affecting their territory and cultural survival, such as oil extraction. The Ecuadorian constitution implemented in 1998 promises “to protect the public’s right to live in a healthy environment and to prevent contamination.” It guarantees the “non-transferable ownership of communal lands, which will be inalienable and indivisible” and specifically guarantees indigenous participation in the use and administration of non-renewable resources and in the benefits resulting from exploitation of those resources, as well as indemnification for damages caused by exploitation. The constitution preserves the state’s claim over subsoil resources, including oil, and decrees that these resources be exploited in the national interest. Further, the International Labor Organization’s 1989 Tribal People’s Convention (ILO 169) ratified by Ecuador in May 1998 states that the “[g]overnment shall consult the peoples concerned whenever consideration is being given to legislative or administrative measures which may affect them directly” and specifies that the peoples concerned shall have the right to decide their own priorities for the process of development as it affects their lives, beliefs, institutions, and spiritual well-being. Article 15 of ILO 169 specifically provides that “when the state retains ownership of subsoil resources, governments shall consult with” peoples whose lands are affected to determine to what degree proposed projects will prejudice their interests prior to any undertakings pertaining to their land.

Apparently, the ChevronTexaco project was pushed through without public participation in clear disregard of the rights and protections afforded to indigenous communities. Indigenous communities were neither consulted nor allowed to meaningfully participate in the State’s decision regarding oil exploration and extraction between 1971 and 1990 during the bulk of Texaco’s operations in Ecuador. Despite Ecuador’s ownership of the subsurface resources, a recent legal finding suggests that indigenous peoples have the right under international law to veto any exploitation without their consent. The Inter-American Court of Human Rights issued on August 31 2001 a decision ruling that “the government of Nicaragua violated the rights of the Was Tingni community when it granted concessions to a private company to log on the community’s traditional lands without consulting with the community or obtaining its consent.” This is the first binding decision that holds that “indigenous peoples have communal property rights to land and natural resources based upon traditional patterns or use and occupation” and that “as a result of customary practices, possession of the land should suffice for indigenous communities lacking real title to property of the land to obtain official recognition of that property. Because Ecuador is a state party to the American convention on Human Rights on which this decision is based, the ruling could prove to be a critical legal precedent for Ecuadorian indigenous communities.

Texaco however argues that the environmental and labor laws referenced in the lawsuit are not applicable because according to the Ecuadorian Civil Code, claims for damages must be brought within four years of the alleged activity. Moreover, ChevronTexaco notes that the laws referenced in the suit did not exist at the time of the operation of the firm and are therefore not applicable. The Ecuadorian legal system has a “general principle of non-retroactivity of laws’ and therefore “it is not appropriate to hold [their] operations responsible for meeting the requirements of a law or regulation that did not exist at the time of the operations.” Neither Article 15 of Agreement No. 169, the Ecuadorian constitution of 1998, nor the Environmental Management Act (issued in 1999) were in effect in Ecuador at the time of the alleged damage.

Means of Redress Against Multinationals
Plaintiffs wishing to claim damages against multinationals generally prefer to file the suit in courts in developed countries because they offer more independence, more attorneys for plaintiffs are available, and the cases draw public attention that putting pressure on companies to settle their claims. Further, rules regarding discovery and the relative ease of bringing class action suits in courts in the United States are particularly attractive to plaintiffs. However, jurisdictional questions have the potential to tie up cases for years as evidenced by the Aguinda case. On the other side, defendants typically argue for cases to be heard in the country where the incidents allegedly occurred. This tactic can practically stifle prosecution because most American plaintiff lawyers have neither money nor expertise to sue in courts in developing or least-developed countries. Should the MNEs lose in the case, they will often argue that the legal process was flawed. Further, MNEs also argue that their headquarters in the United States should not be held responsible for the errors committed by its subsidiary while operating in a developing country.

Barriers to Redress Against Multinationals
1. National reluctance to enforce regulations that might threaten foreign investment;
2. Corporate structures place parent corporations beyond the reach of domestic laws;
3. Local communities lack financial resources to seek redress;
4. Ineligibility to bring a case on the basis of standing which typically requires that only individuals demonstrating present harm have legal standing to bring a suit;
5. Some countries preclude further legal proceeding from being brought in its courts if legal action was initiated in a foreign country (such as the law in Ecuador);
6. Multinationals are often structured to ensure that “the entity operating the host state has only limited financial assets to compensate or remediate harm while jurisdictional limitations bar extending the claim to cover the assets of parent entities in developed countries (where the bulk of their assets are located)’
7. Choice of forum or venue;
8. Structure of the multinational (or corporate veil); and
9. Sovereign immunities of governments for suits involving foreign governmental bodies.

Proposed Solutions to Means of Redress against Multinationals
While intergovernmental agreements and the development of national regulations promote corporation accountability on a national or intergovernmental scale, “attempts to develop a legal framework for corporate accountability at the international level have been fragmented and limited by the prevailing view of the international community that public international law can bind countries but not corporations.” Thus, it would appear that the barriers to redress for multinational wrongs at the national level cannot be dealt with by individual governments acting alone.

Alternatively, an international approach could serve two primary functions, that is, to facilitate systematic reforms to national means of redress and to create an international means of redress where national systems fail. This case study proposes the first step to get governments to work together to identify those means of redress that already exist as well as the gaps or failures in their implementation to be followed by governments after they have reached an agreement on a principal mechanism for redress. Based on those principal elements identified, “an international agreement on national means of redress fro multinational wrongs” could be implemented. Such an international agreement would, in addition to providing financial and technical assistance to national governments for implementation, set out elements of eligibility (standing), provide financial and legal resources to bring suits, set rules on the timing and manner of conducting hearings, set forth remedies, and provide for the enforcement foreign judgments. Secondarily, “in addition to serving as a backstop to failures in national procedures, an international framework of means of redress would also require that individuals be granted access to international channels of redress.”

Source:
32 Denv. J. International Law & Policy 701