For years, international lawyers have been waiting with bated breath for arbitrators to denounce the injustice of Ecuadorian courts. That moment has finally arrived, not in the notorious and high-stakes Chevron battle, but in the obscure and measly case of Merck, Sharp & Dohme versus Ecuador.
In a January award, leaked in early spring to the Investment Arbitration Reporter, arbitrators held Ecuador liable for rendering a denial of justice when its judges held Merck liable for a sum self-evidently disproportionate to the underlying cause of action. (Arbitrators have yet to set damages.)
“When a court makes itself an instrument of oppression in the relations between an investor and a state, that obviously will be a denial of justice,” says arbitration legend Jan Paulsson.
Grand declamations of this sort went out of fashion early in the last century. But early this century, in his book Denial of Justice Under International Law, Mr Paulsson predicted the doctrine’s “renaissance”.
Evidence of a rebirth was initially scant. Unhappy foreign investors would routinely try their luck in domestic courts, regret doing so, raise denial of justice in arbitration, and then win on other grounds. When I surveyed the case law in early 2013, for 'The Rise of Arbitral Power over Domestic Courts', I found only one clear instance of arbitrators invoking the doctrine against an abusive judiciary.
But Merck caps a verifiable trend. Investment Arbitration Reporter counts at least six denial of justice holdings in the past six years, with Flughafen versus Venezuela the most noteworthy until now.
Merck set the current dispute in motion when it slighted a local rival by selling a small factory to another bidder. Ecuadorian courts swung between $1.5m and $200m in compensation, ending at $42m, based on a problematic report bizarrely sharing the name of the problematic report in Chevron. The arbitrators stressed that Ecuador’s highest administrative court twice raised the damages after being rebuked by the constitutional court – and so “abdicate[d] its autonomy”. (States may complain that they’ll be damned either way, as the dissent in Phillip Morris versus Uruguay perceived a denial of justice in a divergence between administrative and constitutional courts.)
Merck is notable because the judicial defect seems substantive rather than procedural, and because the arbitrators were willing to rest that finding on a relatively lax standard. For while the panel held that the behaviour of Ecuadorian courts “shocked the conscience” meeting the customary formula for denial of justice, it also found that certain language in the treaty allowed for a looser standard.
So is a denial of justice 'renaissance' finally upon us? I put the question to the original prophet.
“The best way of answering,” says Mr Paulsson, “is to say that my book has gone out of date because of the number and quality of newer decisions.” He recently called Cambridge University Press, and signed a contract for a second edition. Who knows? Maybe even Chevron in Ecuador will provide new material. Sometimes, as in the Yukos cases, a token award paves way for something much bigger.
Michael D Goldhaber serves as US correspondent for the International Bar Association. He has been tracking the world’s largest disputes since the turn of the millennium. Email: firstname.lastname@example.org