Phoenix Canada Oil Co. Ltd. v. Texaco, Inc.

• Decision Date: 13 March 1987
• Docket Number: Civ. A. No. 76-421-JRR.
• Citation: 658 F. Supp. 1061
• Parties: PHOENIX CANADA OIL COMPANY LIMITED, Plaintiff, v. TEXACO, INC., Texaco Petroleum Company and Ecuadorian Gulf Oil Company, and Gulf Oil Corporation (now, by change of name, Chevron U.S.A. Inc.), Defendants.
• Court: U.S. District Court — District of Delaware

658 F. Supp. 1061

PHOENIX CANADA OIL COMPANY LIMITED, Plaintiff, v. TEXACO, INC., Texaco Petroleum Company and Ecuadorian Gulf Oil Company, and Gulf Oil Corporation (now, by change of name, Chevron U.S.A. Inc.), Defendants.

Civ. A. No. 76-421-JRR.

United States District Court, D. Delaware.

March 13, 1987.

COPYRIGHT MATERIAL OMITTED

Thomas D. Hughes, of Hughes & Sisk, Wilmington, Del., Victor F. Muskin, and Sally L. Schneider, of Gruen, Muskin & Thau, New York City, of counsel, for plaintiff.

William O. LaMotte, Jr., and Richard D. Allen, of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., Milton Sherman, Myron Kirschbaum, Scott M. Berman, and John W. Schryber, of Kaye, Scholer, Fierman, Hays & Handler, New York City, of counsel, for defendants.

OPINION

ROTH, District Judge.

This is a diversity action, brought more than ten years ago by plaintiff, Phoenix Canada Oil Company Ltd. ("Phoenix"), claiming breach of contract, unjust enrichment, and intentional infliction of economic distress by defendants, Texaco, Inc. ("Texaco"), Gulf Oil Corporation, now by change of name Chevron U.S.A., Inc. ("Gulf"), Texaco Petroleum Company ("Texaco Ecuador"), a Delaware corporate subsidiary of Texaco, and Ecuadorian Gulf Oil Company ("Gulf Ecuador"), a Delaware corporate subsidiary of Gulf. The litigation arose from an agreement ("the 1965 Contract") by which Phoenix and Norsul Oil and Mining, Ltd. ("Norsul") assigned to Texaco Ecuador and Gulf Ecuador the rights to explore for and exploit petroleum reserves in a concession area in eastern Ecuador, in return for a payment of $100,000 plus two percent of the value of net production of crude oil and natural gas.

There have been a number of prior decisions in this case, both reported and unreported, which have narrowed and defined the issues. In Phoenix I, 78 F.R.D. 445 (D.Del.1978), the Court considered and denied both defendants' motion to dismiss on the basis of forum non conveniens and the doctrines of act of state and foreign government compulsion and plaintiff's motion for partial summary judgment.

In Phoenix II, 560 F.Supp. 1372 (D.Del. 1983), the Court took up defendants' motion for summary judgment. On the breach of contract claim, the court granted defendants' motion, ruling that Ecuadorian law applied and that defendants did not breach the 1965 contract when Texaco Ecuador and Gulf Ecuador stopped making the two percent payments on portions of their concession areas which were acquired by the Ecuadorian State Petroleum Corporation ("CEPE").

The Court further ruled in Phoenix II that plaintiff's claim, based on the allegation that defendants engaged in a continuing scheme to destroy plaintiff as an economic entity, was barred by the Delaware statute of limitations, 10 Del.C. § 1806, since none of the acts which would give rise to a cognizable cause of action had occurred within the three years preceding the filing of suit.

Finally, the Court denied summary judgment on the unjust enrichment claim, holding that Ecuadorian law applied, that there was a reasonable basis to conclude that Ecuadorian law recognized the concept of unjust enrichment, and that there were issues of material fact as to whether CEPE's compensation to Texaco Ecuador and Gulf Ecuador for the acquisition of its interest in the concession area reflected only the depreciated value of assets and equipment, or included compensation for production rights, and, if so, as to whether defendants had received a benefit from the transfer to CEPE.

In Phoenix III, C.A. 76-142 (D.Del., July 20, 1984) Available on WESTLAW, DCT database, the Court ruled that, if an Ecuadorian court were to allow a general unjust enrichment cause of action, the court would apply an action "de in rem verso", which action is comprised of five elements: (1) enrichment of defendants, (2) loss to plaintiff, (3) lack of justification for the enrichment, (4) no other available remedy, and (5) absence of law barring the remedy. Phoenix III, slip op. at 11 Available on WESTLAW, DCT database. The Court also considered in this Memorandum Opinion, plaintiff's claim that defendants miscalculated the two percent payments during three quarters in 1973 and 1974. The Court held that there was no miscalculation. However, this latter ruling was vacated on June 11, 1985, and the claim for the three miscalculated quarterly payments was reinstated.

Trial on the claims of unjust enrichment and of underpayment for the three quarterly periods was held in September 1986. The Court makes the following findings of fact and conclusions of law.

FINDINGS OF FACT

The incidents which gave rise to this litigation took place for the most part in Ecuador, a South American country which straddles the Equator. Ecuador has three major geographic regions: the lowlands of the Pacific coast, the Andes highlands where the capital, Quito, is located at an elevation of 9,200 feet, and the Oriente or eastern lowlands, a sparsely populated area, including the eastern slopes of the Andes and part of the Amazon River basin.

There had been unsuccessful exploration for oil in the Oriente in the 1920's and the 1940's. Oil exploration began again in the region in 1961. In July 1961, the Government of Ecuador granted a concession to Minas y Petroleos del Ecuador ("Minas")¹ to explore for petroleum reserves and to exploit them, if discovered, in 4,350,000 heçtares (approximately 10,744,500 acres or 16,788 square miles) in the Napo, Pastaza, and Morona Santiago provinces of the Oriente region ("1961 Concession"). The grant of the 1961 Concession to Minas by the Government of Ecuador was authorized by Decree 1401, which set out the terms and conditions of the concession contract (the "1961 Contract").

Plaintiff Phoenix's involvement with the Ecuadorian concession goes back to 1961 when one Howard Steven Strouth approached S. Donald Moore, president and sole operating officer of Phoenix, in order to acquire a public company to facilitate the financing of Minas's operations. Moore introduced Strouth to the principals of a small Canadian corporation, then dormant. Strouth's group acquired a controlling interest in that company, Norsul Oil and Mining, Ltd. Minas then became Norsul's wholly owned subsidiary. From 1961 to 1971 Strouth was Norsul's major stockholder, Managing Director, and principal operating officer.

Phoenix did not itself contribute to Minas's operations in 1961. However, in 1963, Strouth again approached Phoenix to become a participant in the venture. He met with Moore in Calgary in early 1963. As a result of that meeting, Phoenix agreed to contribute certain funds to the maintenance of the concession area and further agreed that Moore would contribute oil industry expertise to Norsul, all in consideration of an undivided 30 percent interest in the concession area. According to Moore, Phoenix's interest was later increased to 60 percent.²

The 1961 Contract required that Minas make certain minimum yearly investments for exploration and exploitation operations and that it pay annual surface taxes. Minas did not have the capital to undertake an extensive exploration program in the area. Instead, Strouth hoped to interest a large oil company in purchasing the concession from Minas. Because Minas failed to do the required exploratory work, was habitually in arrears in meeting its financial obligations, and engaged in speculative activities, the 1961 Contract was in danger during the early 1960's of being cancelled by the Government of Ecuador.

In 1964, defendants Gulf and Texaco, through Ecuadorian subsidiaries, also became involved in exploring for oil in the Oriente. The Government granted them the Napo Concession, which adjoined the Minas 1961 Concession on the north. During 1964 there were contacts between Minas and defendants concerning the possibility of a joint survey of the boundary between the Minas and Napo concessions and the acquisition by defendants of part of the Minas concession.

In January 1965, Moore arranged with Max Crawford of Texaco to meet in Trinidad to discuss a new proposal for participation by defendants in the Minas 1961 concession. Moore met with one of Texaco's principal geologists, a Mr. Martin, on January 27 to present a proposal for Gulf and Texaco to acquire a portion of the 1961 Concession. Moore took the position that because Phoenix owned 60 percent of Minas, he was the person with whom to negotiate concerning the 1961 Concession. Strouth at the same time contended that Norsul owned all the shares of Minas and that he was the one to deal with. After looking into the matter, Texaco decided to negotiate with Strouth.

Strouth had moved to Quito as a result of a condition imposed by Phoenix when it began its participation in the Minas 1961 Concession venture. In early 1965, Strouth began discussions in Quito with representatives of Texaco. On April 1, 1965, Max Crawford made an offer by letter on behalf of Texaco and Gulf to acquire from Minas 500,000 hectares of the 1961 Concession in return for a cash payment plus an overriding royalty for any production developed and exploited. This transaction would be subject to the approval of the Government of Ecuador.³

On July 16, 1965, Compania Texaco de Petroleos del Ecuador, C.A. ("Texaco del Ecuador"), an Ecuadorian subsidiary of Texaco Ecuador, and Gulf Ecuatoriana de Petroleo, S.A. ("Gulf Ecuatoriana"), an Ecuadorian subsidiary of Gulf Ecuador, contracted with Minas to acquire a portion of Minas's interest in the 1961 Concession. This area, comprising 650,000 hectares directly south and east of the Napo Concession, has become known as the Transfer Zone or the Coca Concession. Moore did not participate in the negotiation of this contract (the "1965 Contract"). Strouth, not Moore, signed the contract on behalf of Minas.

The 1965 Contract provided that Minas assign its interests in the Transfer Zone to Texaco del Ecuador and Gulf Ecuatoriana, or their designees, in exchange...