Chevron's Ecuador oil fight comes to Canada

It’s the biggest environmental lawsuit in history, with $20 billion on the line. On one side is American oil giant Chevron, on the other, Ecuadorean villagers. Now, in the oddest twist yet, the case has landed before an Ontario judge. This is going to get messy.

San Carlos, Ecuador, where there is both oil and high rates of cancer (Photo: Caroline Bennett)

Scenario # 1: There is a swath of the Amazon jungle in Ecuador teeming with oil waste. The water is polluted. The locals are sick and dying from the abandoned oil operations of an American multinational that swept in, pilfered the oil, poisoned the land and fled with the spoils.

Scenario #2: At Chevron’s headquarters outside San Francisco, executives are co-ordinating the fight against a vast conspiracy involving a group of opportunistic Ecuadoreans, led by corrupt American lawyers, to extort one of the world’s biggest corporations out of billions of dollars.

These are two versions of the same story and the subject of one of the largest environmental lawsuits in history. One of them is right. A Canadian court has now been asked to choose a side.

For more than 20 years, Texaco Petroleum and state-run oil company PetroEcuador led a consortium that tapped the crude oil reserves beneath the floor of the Amazon Basin adjacent to the Colombian border. It was a dirty job. By the time Texaco left Ecuador in 1992, the lawsuit alleged that billions of litres of toxic wastewater had been discharged into the ecosystem, and hundreds of open pits of oil sludge left to seep into the ground. Few dispute that an ecological and human-health disaster occurred in Lago Agrio, the Ecuadorean oil town named after Sour Lake, Texas, where Texaco was founded. Unlined pools of decades-old oil waste openly fester to this day. Reports of rampant cancer, and images of children diving from rusted pipelines into murky ponds, have rallied support from environmental groups and activist celebrities. Thousands of indigenous Ecuadoreans and poor settlers who were drawn to the jungle outpost when oil was struck more than 40 years ago say they were left to suffer the fallout of a “rainforest Chernobyl.” They call themselves “Los Affectados”—the Affected Ones.

When Chevron acquired Texaco for US$45.8 billion in 2001, it didn’t foresee the size of the problem it inherited. What began as a long-shot environmental lawsuit launched by the Ecuadorean locals 20 years ago culminated last year in a staggering US$19-billion judgment against Chevron in a courtroom in Lago Agrio. It was a major milestone in two decades of legal proceedings spanning more than a dozen U.S. courts, the courtrooms of numerous Ecuadorean judges, even an arbitration hearing at the Hague. “We’ll fight this until hell freezes over,” a Chevron spokesman once said. “And then we’ll fight it out on the ice.”

Whatever the problems in Ecuador, Chevron says it is not to blame. If Texaco’s practices were substandard, they were accepted and legal in the country at the time. If there is a mess yet to be cleaned up, it is the fault of the Ecuadorean government. If people are dying from cancer, poor sanitation is the cause. And the Ecuadorean judgment, the most punitive in the history of environmental law, is a perversion of justice perpetrated by the plaintiffs’ lawyers, consultants and the judge himself. “It’s not just a fraud on the court, it’s a fraud with the court,” says Chevron spokesman Kent Robertson. To the Ecuadorean plaintiffs, the company says it won’t pay a cent.

Chevron has nothing left in Ecuador for authorities to seize. But the company has significant assets in dozens of other countries, including Canada. So the plaintiffs appealed to the Canadian judiciary to intervene. Through a claim filed in May, the Ontario Superior Court of Justice has become the staging ground for the lawsuit. In a saga that has seen a number of legal firsts, it’s an unusual application of the law: attempting to hold a subsidiary liable for a judgment against its parent company.

Nobody suggests Chevron Canada had anything to do with what happened in Ecuador. But if a Canadian court rules that the subsidiary’s assets can be seized to satisfy the judgment, it could set a precedent that resonates through the Canadian legal system. “It’s novel and untested,” says Vaughan Black, a professor at Dalhousie University’s Schulich School of Law. “This is an incredibly important action.”

Fighting this legal saga through the media is virtually a full-time job for Chevron’s Kent Robertson. For every claim or criticism against his company regarding Lago Agrio, he has a retort. Robertson says Chevron has become a scapegoat for all the ills of Ecuador. He says Texaco duly cleaned up its share of the oil waste pits and was released from further liability by the Ecuadorean government. “The true threat to human health in the region is fecal bacteria in the water,” says Robertson. “There isn’t a single sewage treatment plant.”

This interpretation is hard to accept for those who take the so-called toxic tour. Guided by representatives of the plaintiffs, the trek from one sludge pit to the next through the jungle offers visceral evidence of what environmentalists call one of the Amazon’s worst ecological catastrophes. “All the mess left by Texaco is pretty much intact to this day,” says Pablo Fajardo, the lead Ecuadorean attorney for the plaintiffs. The Ecuadorean government claimed Texaco failed to identify hundreds of the waste pits it left behind. Of the sites the company remediated, many were simply covered with dirt, it said. In 2007, Ecuadorean president Rafael Correa said the pollution constituted a “crime against humanity.”

Ecuadoreans began their fight over Lago Agrio with a class-action lawsuit in a New York court in 1993, the year after Texaco’s contract ended and it turned over operation of the oil wells to PetroEcuador. Texaco fought to have the suit dismissed, arguing that Ecuador was the appropriate venue. The company’s lawyers attested to the adequacy of the country’s judiciary and promised to abide by its decision. Texaco won that round. The lawsuit was dismissed in 2001. When the proceedings got under way in Lago Agrio two years later, Chevron’s lawyers challenged the court’s jurisdiction. But Texaco’s endorsement of Ecuadorean justice came back to haunt Chevron. A company press release says it has become the victim of a judgment that would not be enforceable “in any court that observes the rule of law.”

Chevron does not dispute the existence of unremediated pits in the area. But it says the shame of the toxic tour belongs not to Texaco but its former Ecuadorean partner. “PetroEcuador and the Ecuadorean government must be responsible for the decisions since they were the owners,” Adolfo Callejas, one of Chevron’s lawyers argued in Ecuadorean court. The company says the Ecuadorean government dragged its feet for two decades. And when it finally got around to cleaning up some of the waste, the government allocated just US$70 million—a tiny fraction of the US$19-billion tab handed to Chevron. The cost of the government program, however, is no indication of the huge amount of resources required for a comprehensive remediation of hundreds of pits, says Karen Hinton, U.S. spokeswoman for the plaintiffs. “You could spend $70 million at one of these pits,” Hinton says. “It’s a massive expenditure, especially when it’s been sitting there for, in some cases, five decades.”

Alan Lenczner says he’s no “tree hugger.” His recent defence of Brazilian mining firm Vale against an environmental claim in Ontario is proof of that, as is his service on the board of HudBay Minerals. But earlier this year, Lenczner received a call from Pablo Fajardo, inviting the veteran Canadian litigator to visit Lago Agrio. “If you just went down there and saw it, you’d say to yourself, ‘It has to be cleaned up,’” Lenczner says.

Convinced of the legitimacy of the judgment against Chevron, Lenczner agreed to try to have the Ecuadorean judgment recognized in a Canadian court and have the US$19-billion penalty imposed against Chevron’s Canadian subsidiary. The plaintiffs were drawn to Canada in part by the extent of Chevron’s Canadian operations, which include interests in the Athabasca oilsands and the Hibernia oilfield off the coast of Newfoundland, Fajardo says through a translator. “And also, the long tradition in Canada’s courts of recognizing foreign judgments.” He’s referring to a landmark Supreme Court of Canada decision in 2003 that established the rules for enforcing judgments of foreign courts.

Chevron insists Canada is not the right forum and Chevron Canada is an indirect subsidiary of the parent company, operating without financial assistance. “If someone wants to sue Chevron Corporation, they need to do that in the United States,” Robertson says. Chevron has an alternative theory for why the plaintiffs chose Canada. “We’ve got a lot of evidence of fraud,” Robertson says, referring to arguments the company made in various U.S. court proceedings. “We’re more than happy to defend this in the United States. The only parties that don’t seem interested in the U.S. courts anymore are the plaintiffs.”

New York lawyer Steven Donziger has dedicated his entire career to pursuing Chevron on behalf of the Ecuadoreans in court and, just as often, through the media. To help dramatize the plight of his Ecuadorean clients, Donziger asked a documentary filmmaker to follow him through the three-year trial in Lago Agrio. The result, Crude, debuted at the Sundance Film Festival in January 2009. Chevron’s lawyers saw it, and they asked U.S. Judge Lewis Kaplan for access to the discarded footage. The motion was granted. What the legal team found at best undermined the credibility of the plaintiffs’ campaign. At worst, as Chevron argues, the outtakes offered evidence of a criminal conspiracy among the plaintiffs’ legal team.

In one scene, Donziger plays down the results of a water sample that does not prove to be as polluted as previously thought, and test results that showed less extensive groundwater contamination. “This is Ecuador, OK?” Donziger says to his colleagues. “You can say whatever you want and at the end of the day this is all for the court, just a bunch of smoke and mirrors and bullshit.”

The Chevron legal team pounced. They convinced Kaplan to order the release of Donziger’s private documents, essentially overruling attorney-client privilege, a rare judgment that saw the defence team get access to confidential e-mails, memos, even Donziger’s private diary. In that material, Chevron learned Donziger knew in advance that a geological engineer named Richard Cabrera would be appointed by the court to solely determine the damages for which Chevron could be held liable. In a meeting with Cabrera and Fajardo, the Ecuadorean lawyer, Donziger says in one of the outtakes, “We could jack this thing up to $30 billion in one day.” Cabrera’s report later recommended that Chevron be held liable for damages of US$27 billion. Those findings were reviewed and supported by Stratus, a U.S. consulting firm. E-mails subsequently showed that Stratus itself essentially drafted Cabrera’s report. All of which led Chevron to allege a sweeping conspiracy to defraud. It sued Donziger for racketeering. “The thinking from the plaintiffs’ camp was that ‘we can take a company’s reputation hostage. Squeeze them enough and they’ll settle,’” Robertson says.

If an Ontario judge decides to consider the claim against Chevron, the company could argue the original judgment was procured by fraud. Donziger and his colleagues say the consultation on the report was nothing out of the ordinary and, for that matter, the excerpts cherry-picked from the Crude footage were taken out of context. In any event, any fraud presented as a challenge in Canada must not have been already aired and ruled upon in court, Lenczner says. The allegations regarding the Cabrera report were already extensively considered in Lago Agrio. “The judge said, ‘They made such a fuss about this, I am not going to rely on Richard Cabrera’s report. I’ve got 100 expert reports,’” Lenczner says.

But if the judge himself were complicit in the fraud, as Chevron alleges, how could the company be said to have received a fair hearing in Ecuador? Chevron believes it has evidence that Nicolas Zambrano, the Ecuadorean judge, did not even write the judgment himself. A forensic linguist working for Chevron determined the judgment didn’t match the judge’s writing style. The ruling contains excerpts that appear verbatim in the plaintiffs’ internal documents, the company says. In the Canadian proceedings, Chevron may have recourse to the defence of “natural justice,” through which it could raise allegations of systemic unfairness in the handling of the case.

At this point, the two sides’ positions are entrenched. At a recent shareholders meeting, Chevron CEO John Watson called Donziger and his legal team “criminals who are trying to defraud the company.” The plaintiffs, on the other hand, characterize Chevron as a US$200-billion multinational that refuses to pay a settlement determined by a fair trial that it fought and lost. In an extortion counterclaim filed against Chevron, Donziger argues the company thought it could use its political influence to win the case in Ecuador and, when that failed, resorted to attacking the court and the plaintiffs’ lawyers by fabricating evidence of corruption.

Lenczner says he examined the record of the hearings in Lago Agrio, which spans more than 250,000 pages. “I looked through some of those expert reports; they’re real reports. I looked through the testimony; it’s real testimony.” The Ecuadoreans believe the judgment will pass Canadian standards. “I would like to think we’re at the doorstep and we’re just one step away from being able to seize those assets,” Fajardo says.

Given the complications posed by simultaneous proceedings in Canada, the United States, the Hague and the Ecuadorean Supreme Court, that hope might be misplaced. A Canadian judge may choose to wait for rulings in the other proceedings. A swift resolution seems remote. The more likely scenario: years of acrimonious litigation. Even if hell does freeze over, there is plenty of ice in Canada on which to fight.