Ecuadorian Attorney General Tells ChevronTexaco Shareholders Remediation Agreement May Be Invalid

By William Baue, SocialFunds.com
12 April 2005

The questionable validity of the remediation agreement indemnifying ChevronTexaco could carry implications for the lawsuit and beyond (part three of a multipart article).

SocialFunds.com - An airplane whisked the ChevronTexaco (ticker: CVX) shareholder delegation from Coca, flying them over the Ecuadorian rainforest where they had spent all morning observing judicial inspections of the waste pit sites, to the capital city of Quito. Upon landing, they quickly shuttled to their hotel and changed from their sweat-drenched "jungle clothes" into business suits to attend an evening meeting with Ecuadorian Attorney General (AG) Jose Maria Borja, who reserves Wednesdays from eight to nine for public appointments.

Present at the meeting, the last of the evening for March 9, 2005, were delegation members Leslie Lowe, a lawyer and energy and environment program director at the Interfaith Center on Corporate Responsibility (ICCR); Steven Heim, social research and shareholder advocacy director for Boston Common Asset Management, a socially responsible investment (SRI) firm; and Toni Symonds, deputy comptroller for investments and corporate governance for California State Comptroller Steve Westly, who sits on the boards of the California Public Employees Retirement System (CalPERS), the largest US pension fund with $186 billion. Patrick Doherty of the New York City Employees' Retirement System (NYCERS) had to back out of attending the delegation at the last moment.

Also present were Leila Salazar and Kevin Koenig of Amazon Watch, the nongovernmental organization (NGO) that organized the delegation's trip, Luc Lampiere, a French journalist, and Martha Escobar, a senior member of the AG's staff.

The AG told the delegation several of his opinions about the Maria Aguinda Salazar et al. v. ChevronTexaco case currently on trial in Ecuador. For example, he told the delegation that the remediation agreement did not affect the current litigation because the plaintiffs' claims "do not implicate the government," according to Ms. Lowe. At one point, his presentation was interrupted by a phone call, but before he took it, he revealed important information to the delegation.

"That's when he told us that remediation agreement had been executed 'in violation of the Constitution,'" Ms. Lowe told SocialFunds.com. "We were all stunned and trying to process what had just been said when the AG got up to take the phone call."

In the AG's absence, Ms. Escobar explained that the Ecuadorian Constitution requires the country's Controller General to "review and accept" such agreements. However, the Controller General's signature is nowhere to be found on the agreement, first negotiated in 1995 and sealed in 1998 with the "Final Release of Claims and Delivery of Equipment."

Russ Yarrow, manager of external relations for policy, government, and public affairs for ChevronTexaco, reported the company's reaction to this information.

"We don't have any evidence that the AG said what he is reported to have said, he hasn't said it to us," Mr. Yarrow told SocialFunds.com. "When we did negotiate the remediation agreement, it was done with the full cooperation and participation of the Ecuadorian government at the time."

"But it is our understanding that the Constitutional role of the Controller is to approve any activities that include the flow of public funds, and of course the remediation project included no flow of public funds on the part of the Ecuadorian government," he added.

According to two of the delegation members present at the meeting with Attorney General Borja, the Constitutional stipulation of review and approval by the Controller General applies to any agreement implicating the country's financial liability or natural resources.

"That is not our understanding," Mr. Yarrow said.

The possibility that the remediation agreement and indemnification may not be valid raises issues for the shareholders not only regarding how this development might impact the lawsuit, but also regarding the effectiveness of ChevronTexaco management. Two members of the delegation noted it is standard procedure when negotiating an agreement outside a company's own jurisdiction (be it in another state or another country) to obtain an opinion of local counsel to confirm the contract conforms with all local laws.

"Now the question is, did Texaco have that opinion of local Ecuadorian counsel as to the validity of the remediation agreement?" Ms. Lowe asked. "Did local counsel identify that the Controller General's signature was a necessary signature, and if not, why not?"

"When Chevron merged with Texaco, and they knew about the litigation, did they review the documents for conformity with national law, and if not, why not?" she added.

Mr. Yarrow of ChevronTexaco did not answer SocialFunds.com's questions of whether Texaco secured the opinion of local Ecuadorian counsel on the validity of the remediation agreement and indemnification.

The plaintiffs in the Aguinda lawsuit consider the remediation agreement irrelevant to the case, because it was negotiated with the government, not with the third party private citizens represented in the complaint. However, they do recognize the significance of the potential invalidity of the remediation agreement.

"One cannot ignore the fact that ChevronTexaco is trying to use the existence of this agreement as a total defense at trial," said Steven Donziger, a lawyer for the plaintiffs. "In other words, they believe that this agreement completely exonerates them from any liability regardless of what happens at trial."

Mr. Donziger sees broader implications associated with the status of the remediation agreement.

"The people in the company who are running this case have a conflict of interests vis-a-vis their personal career interests and the interests of shareholders," Mr. Donziger told SocialFunds.com. "The person who's in charge of the case, [ChevtonTexaco Vice President General Counsel for Latin America Products] Ricardo Reis Veiga, is the same person who negotiated this remediation agreement that we claim is fraudulent and which is now a subject of serious dispute in the trial, yet he's running the case for them now trying to defend the remediation agreement that he created."

"He has no perspective on what is now in the best interest of the company because he is personally tied up in defending an agreement that might not be in the best interests of the company, and that is a conflict of interests," he added.

ChevronTexaco and the government of Ecuador are currently in arbitration at the North American Arbitration Association of New York over responsibility for remediation, so the legal status of the agreement is of utmost significance.

"We are preparing-- if the arbitration continues, we are going to try to prove that Texaco used another kind of technique [for disposing of "produced water"] at the same time in other places of the world and in the United States," Ms. Escobar, the Ecuadorian AG's senior staffer, told SocialFunds.com. "In their country, they didn't do this kind of exploration and exploitation."

"We hope we don't have to make these kinds of proofs, because we are trying to suspend the arbitration," she added. "It will be for the Ecuadorians in Oriente, not for the state--it is terrible for our people in the Oriente."

Part one of this multi-part article contextualizes the shareholder delegation fact-finding mission on the lawsuit and the impact of oil operations in Ecuador.

Part two addresses question of whether the contamination found at the inspection sites poses human health or environmental risks.

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