The Attorney General of Ecuador found that an agreement in the form of a Letter of Intent by which the holder of an oil concession agreed to assign its contractual rights to a third party was not in breach of the Hydrocarbon Law (HL) despite the fact that the preliminary agreement was not approved by the Minister of Energy and Mines (MEM). In his ruling, the Attorney General held that it is legal for an oil company to promise the assignment of its contract right to an another company as long as in the original agreement it is established that the future assignment would be subject to the governmental approval. The ruling confirms what had been the traditional understanding of the Government role in the assignment of oil contracts by private parties under the HL. That authorization is only required for the formalization of the assignment itself and not for the execution of any previous understanding.
On October 12, 2006, the Minister of Energy and Mines (MEM) of Ecuador requested to the Attorney General his opinion regarding the application of articles 74 and 79 of the Hydrocarbons Law and his ruling as to whether it is legal to "authorize the transfer of 40% of the rights and obligations of the Participation Contract for the Exploration and Exploitation of Crude Oil in the Blocs 18 and 31, ... as requested by Petrobrass Energía Ecuador in favor of TEIKOKU", taking into consideration – and this appeared to be a source of concern by the Minister --- "the scope and connotation of a ´Letter of Intent´ executed by the parties to carry out such transfer," especially since that Letter of Intent was dated prior to the day when "the request for the authorization was filed with the MEM..".
In his ruling (Letter No. 028608) the Attorney General found that the agreement was legal and ruled that the MEM may well issue the requested authorization. The Attorney General noted that:
- The parties had signed an agreement under the form of ‘Letter of Intent’ with the intention to develop jointly some business in blocs 18 and 31 and to that end they had agreed to "request the governmental authorizations, in accordance to the existing legislation of the Republic of Ecuador".
- The agreement made it clear that the formalization of the eventual assignment of rights and duties on the oil contract will take place only when the Ecuadorian authorities will authorize the execution of that contract.
- The HL, in its article 74 establish that the MEM may declare the "caducity" of oil contracts in the event that the contractor "transfer rights o execute contract o private agreement for the assignment of one o more of its rights, without the authorization of the Ministry."
- In accordance to such provision, article 79 of the HL declares that the "transfer of a contract or the assignment to third parties of the rights arising from a contract, will be null and void without the authorization of the pertinent Ministry, without prejudice of the declaration of caducity".
- The Civil Code (Art. 1489) defines a conditional obligation the one that depends upon "a future event that may or may not happen." And that such condition is known as "suspensive condition" when the acquisition of any right does not take place while that event does not happens (Art. 1495)
- Neither the nature of the agreement executed by the parties nor its features are the typical ones of an assignment contract, for it only reflect a compromise to do something (the assignment of rights and duties), once the condition takes place (obtaining the governmental authorization).
- It is irrelevant, for the foregoing considerations, the fact that the Letter of Intent hand been executed, without the approval of the MEM, prior to the filing of the request for authorization.
The ruling settled some doubts provoked by recent actions of the Ecuadorian Government in connection with the procedure that oil companies had to follow when they decide to assign (partially or completely) their contracts rights to third parties. As the opinion of the Attorney General states the need for government authorization arises only when such assignments are going to be formalized. Prior dealings or understandings that purport to a future assignment of an oil contract, which generally take the form of a Letter of Intent and are common in the industry, fall within the realm of private decisions where no government notification or approval is required.