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Phoenix Canada Oil Co. v. TEXACO Inc.

filed as amended april 26 1988.: March 30, 1988.

PHOENIX CANADA OIL COMPANY LIMITED, APPELLANT IN 87-3389
v.
TEXACO, INC., TEXACO PETROLEUM COMPANY, ECUADORIAN GULF OIL COMPANY, AND GULF OIL CORPORATION, NOW, BY CHANGE OF NAME, CHEVRON, U.S.A., INC. TEXACO PETROLEUM COMPANY AND ECUADORIAN GULF OIL COMPANY, APPELLANTS IN NO. 87-3375



Appeal from the United States District Court for the District of Delaware, D.C. Civil No. 76-421.

Weis, Higginbotham, and Rosenn, Circuit Judges.

Author: Weis

Opinion OF THE COURT

WEIS Circuit Judge.

As the beneficiary of a royalty arrangement, plaintiff Phoenix seeks compensation for its proportionate share of oil production rights in Ecuador which defendant oil companies allegedly conveyed to that government. The district court found that Ecuador had paid defendants only for unamortized capital assets and supplies but nothing for production rights. Consequently, plaintiff did not succeed on that claim. The district court, however, did award plaintiff damages for past-due royalties which had been earned but calculated improperly, finding only defendant subsidiaries liable, not their parent corporations. We will remand for further factual development of a possible agency relationship between parent and subsidiary corporations, but otherwise will affirm.

After a nonjury trial, the district court entered judgment against plaintiff Phoenix Canada Oil Company, Ltd. on its claim for recovery of the value of petroleum production rights, and in favor of Phoenix on its claim for payment of past-due production royalties. The automatic stay provision of the Bankruptcy Code, 11 U.S.C. ยง 362, precluded entry of a final judgment as to defendant Texaco, Inc. However, the district court entered judgment with respect to the other three defendants, certifying there was no cause for delay.

Phoenix's predecessors obtained a concession from the Government of Ecuador to explore for oil in the eastern lowlands of that South American country. Subsequently, Phoenix and a Canadian co-venturer succeeded to these exploration rights, and they, in turn, assigned a portion of their concession territory to Gulf and Texaco in exchange for an immediate cash payment and a royalty on any oil extracted. Although Gulf and Texaco successfully produced oil in the assigned territory, a series of government actions reduced the profitability of the venture, and Gulf eventually sold its interest back to the Ecuadorian government. As a result of this sale, Phoenix's royalty base was reduced significantly. Phoenix brought this suit to recover damages for Its lost royalty interests.

I.

In 1961, the Ecuadorian government granted Minas y Petroleos del Ecuador a concession to explore for oil and, if discovered, exploit the reserves found in an eleven million acre tract. In 1965, Minas entered into a contract with a consortium of Gulf and Texaco subsidiaries. Under the provisions of the agreement, the subsidiaries succeeded to Minas' exploitation rights in a portion of the original concession, a large area of land identified in the contract as the "Coca Concession".*fn1 In return, the subsidiaries made a cash payment to Minas' two corporate owners, Phoenix and Norsul,*fn2 agreeing to pay a royalty calculated at two-percent of the net value of any crude oil or natural gas produced from the area. The government formally approved the transfer, but was not informed of the two-percent royalty arrangement.

Oil was discovered in the Coca Concession in 1969, and actual production began in 1972. To transport the crude to market, the Gulf-Texaco consortium financed and constructed a 318-mile pipeline across the Andes Mountains down to the Pacific Coast. The pipeline cost the consortium $108 million.

Following the 1969 announcement that oil had been discovered, the government required renegotiation of all concession arrangements. The Coca Concession consequently was reduced in area, and the government royalties were nearly doubled from 6% to 11.5%.

In 1971, Ecuador enacted the new Hydrocarbons Law which declared that "the deposits of hydrocarbons and accompanying substances . . . located in the national territory . . . belong to the inalienable and imprescriptible patrimony of the State." Although originally enacted to be prospective in effect, the new law was made retroactive when a military government took power in 1972.

The 1971 Hydrocarbons Law further reduced the size of concessions and again raised the government's royalty. In addition, the statute provided that the government's royalty and income taxes would henceforth be computed for all producers on the basis of a uniform "reference price", which could be set either by agreement with the producers or unilaterally by the government. The law also mandated governmental participation in oil production through "association contracts" to which the national oil agency, Corporacion Estatal Petrolera Ecuatoriana (CEPE), would be made a party.

The consortium requested indemnification from the government for the area that had been returned in compliance with the Hydrocarbons Law. The government refused, explaining that the payment of compensation for the return of "the inalienable interests of the Nation" was inconsistent with the petroleum policy of the "Nationalistic and Revolutionary Government of the Armed Forces."

Citing the increasing costs of doing business under the new military government, the consortium insisted that the original provisions of the 1965 contract had been frustrated and demanded renegotiation of two-percent royalty proviso with Phoenix. In early 1973, the parties reached an "Interim Agreement" to govern the calculation of the royalty payments due for the last two quarters of 1972 and the first quarter of 1973. This document, however, stipulated that the signatories were not waiving their rights under the original 1965 contract.

Although the Interim Agreement expired after the first quarter of 1973, its terms were followed through the third quarter of 1973. A dispute between the parties arose when the consortium continued to calculate the two-percent royalty under the Interim Agreement for the final quarter of 1973 and the first and second quarters of 1974. The district court's ruling on that point is one of the issues in this appeal.

The Interim Agreement renegotiation drew the government's attention to the previously unknown two-percent royalty arrangement. The Ecuadorian Natural Resources Minister reacted with hostility to the news of the discovery, declaring it an "illegal" and "immoral" attempt to partition a national resource belonging inalienably to the people of Ecuador. Rather than voiding the royalty outright, as the Resources Minister urged, the government instead imposed an 86% retroactive tax on the payment of the two-percent royalties.

In 1973 the government issued a decree establishing the terms of a new model contract, which the consortium and other oil producers were bound to accept in lieu of existing agreements. The model contract granted CEPE the right to acquire up to a 25% participation in the "rights and actions conferred in this contract and in the assets acquired by the contractors for purposes of this agreement." Also included were a tax reference price unilaterally set by the government, a provision shortening the Coca Concession exploitation period, and an expansion of state-imposed discounts for oil purchased for domestic use in Ecuador.

Consortium efforts to negotiate a mutually advantageous purchase price for the 25% interest proved unavailing. Instead, the government stated flatly that CEPE would begin its 25% participation on June 6, 1974 and that compensation would be computed on the basis of net book value, or the unrecovered actual investment in producing and pipeline assets. An independent auditor was engaged to establish the exact value of the unrecovered investment. The government rejected the consortium's request to be paid for future production rights lost as a consequence of the transfer.

The following year, a resolution announced that CEPE would not pay for its proportionate share of the cost of the pipeline. In conducting its 1976 audit, Peat, Marwick, Mitchell & Company excluded the pipeline expenditures and calculated the net book value of the consortium's investment at $182 million. Over a nearly five-year period, Ecuador paid the consortium one-fourth this sum, or a total of $45,033,671. No interest was paid for the delay.

While the CEPE acquisition proceeded, other significant events were taking place as well. In June 1974, the government issued Resolution 11927 to clarify the two-percent royalty due Phoenix and Norsul from the consortium. The expressed purposes of this resolution were to "terminate the disagreements arising out of the assessment and payment of two-percent of the net production" and to "establish with certainty the taxable base which generates the [86%] income tax."

The Resolution imposed an additional requirement that Phoenix and Norsul invest at least half of their remaining 14% after-tax royalty payments in Ecuador. The Resolution also provided that CEPE's newly acquired 25% interest "be excluded, in order to carry out the assessment of the 2%." When challenged by Texaco, the Resolution was affirmed by a Ministerial Sentencia in October 1974.

In the years that followed, the government of Ecuador took other drastic steps which further diminished the profitability of the consortium's Coca Concession venture. One new requirement directed that the consortium deposit all export proceeds with the Ecuadorian Central Bank in order to ensure the government its petroleum royalties.

Income tax rates rose to 71.5% in 1975. Ecuador nearly tripled its government oil royalty to 17%, announcing that the royalty would be computed on the basis of "presumed", rather than actual, petroleum production. The figure the government assigned to this "presumed" production not only exceeded actual output, but was greater than the maximum volume of oil the consortium was legally permitted to produce. Finally, CEPE began extracting and selling more than its 25% share of crude, without the authorization of, or compensation to, the consortium. When Gulf protested these practices, the state threatened forfeiture.

When its relationship with the government continued to deteriorate, Gulf decided to withdraw from the consortium by selling its remaining 37.5% interest*fn3 to CEPE. The sale price was to be calculated on the basis of the unrecovered actual cost of Gulf's investment in producing assets, its materials and supplies inventory, and its undepreciated and unamortized interest in the pipeline. The accounting firm of Deloitte, Haskins and Sells performed the audit on Gulf's assets, listing its total share as $118 million.

CEPE made two payments to Gulf: one in May 1977 and a second in April 1979. No part of these payments was forwarded to Phoenix or Norsul. Following CEPE's acquisition of Gulf's Coca Concession interest, Gulf ceased paying royalties to Phoenix and Norsul. Texaco, however, continued its petroleum production activities on the Coca Concession and continues to pay its 37.5% share of the royalties.

Phoenix brought this suit in 1976, contending that the consortium's 25% sale to CEPE included payment for lost production rights. Phoenix claimed a share of the sale's proceeds corresponding to its lost royalty expectation. It made similar claims as to Gulf's 37.5% sale to CEPE in 1976.

Phoenix asserted its claims under theories of unjust enrichment, breach of contract, and breach of fiduciary duty. Finding that the law of Ecuador controlled, the district court allowed the case to proceed on a theory of Ecuadorian civil law known as de in rem verso, analogous to an action for unjust enrichment. This restitution theory, the court ruled, subsumed Phoenix's quasi-contract claim. The court rejected Phoenix's claim for breach of fiduciary duty as untimely pressed.

After years of discovery and extensive pretrial proceedings that included a grant of partial summary judgment, the case reached trial in September 1986. Following a month-long bench trial, the district court prepared a thorough opinion reciting its extensive findings of fact and conclusions of law. Phoenix Canada Oil Co. Ltd. v. Texaco, Inc., 658 F. Supp. 1061 (D. Del. 1987) (Phoenix IV).

The district court ruled that Phoenix could not succeed on its unjust enrichment claim because neither the consortium in its joint 25% transfer in 1974 nor Gulf in its 37.5% sellout in 1977 had received any compensation for lost production rights or future profits. The government of Ecuador had expressly intended to pay only for the depreciated and amortized book value of the acquired assets, plus the book value of their material and supplies inventory. "It was contrary to the political philosophy of the Government of Ecuador in 1974 and in 1977 to pay for the oil reserves, which were the property of the State, the rights to exploit those reserves, or the future profits that might be earned from those reserves." Phoenix IV, 658 F. Supp. at 1078. Because Phoenix was not entitled to share in the value of the consortium's assets, the claims for unjust enrichment failed.

The court found in favor of Phoenix on its breach of contract claim that the consortium had improperly calculated the royalties due for the final quarter of 1973 and the first two quarters of 1974. The consortium had computed the two-percent royalty during those quarters on the basis of the price of West Texas sour crude oil as adjusted for transportation costs. This calculation proved especially advantageous for the consortium because, although the world price of oil rose dramatically during this period, federally-imposed controls capped the cost of West Texas crude at a rate far below world market levels.

The court concluded that the consortIum's application of the West Texas price breached the parties' 1965 contract. Because the higher Ecuadorian government reference price was the proper basis for calculating the two-percent royalty, Phoenix had been underpaid by $365,479. To that sum, the court added prejudgment interest of $532,608.71 -- computed in accordance with the escalating Ecuadorian rates -- for a total judgment of $898,087.71. Phoenix's claim for consequential damages, consisting mainly of attorney's fees, was denied because it had not been included in the pretrial order. This appeal followed.

Phoenix contends here that the district court erred in equating the amounts CEPE paid to the consortium with the interests actually transferred. In Phoenix's view, the consideration defendants received included reimbursement for future petroleum production rights. Because Phoenix's royalty arrangement entitled it to a share of the future Coca Concession production proceeds, it claims a right to a portion of CEPE's payments. Phoenix also ...


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