(Updates with comment from Chevron, additional details about the case.)

By Chad Bray

Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--A U.S. judge declined Thursday to stay an international arbitration in a dispute between Ecuador's government and Chevron Corp. (CVX) over who should pay for alleged environmental damages in the country's Amazon region.

In a ruling from the bench, U.S. District Judge Leonard B. Sand in Manhattan said Chevron's claim that Ecuador's government has infringed on its right to due process in a $27 billion environmental lawsuit there is a claim that can be arbitrated.

As a result, "a stay of arbitration is inappropriate," the judge said.

The arbitration panel has been chosen, but it's unclear how quickly an arbitration could be heard. The timing and scope of the arbitration would be up to the panel, the judge said.

Ecuador filed a lawsuit against Chevron in U.S. District Court in Manhattan in December, seeking to stop an arbitration by Chevron under the rules of the U.N. Commission on International Trade Law, or Uncitral.

Chevron had requested international arbitration in September, claiming Ecuador's government was interfering in a long-running lawsuit brought by local indigenous groups over alleged environmental damage caused by Texaco Inc. and is violating a prior agreement releasing Texaco from environmental claims. Chevron acquired Texaco in 2001.

Ecuador's government has denied any interference.

C. MacNeil Mitchell, a lawyer for Ecuador, said the republic is considering whether to appeal the decision.

Kent Robertson, a Chevron spokesman, said the judge's ruling was an important development in its efforts to pursue arbitration.

The arbitration panel "is one of the few bodies that can compel Ecuador to do the right thing and clean up the Amazon," Robertson said. "With today's decision, we are one step closer to making that a reality."

Jonathan S. Abady, a lawyer for the indigenous groups, called the move for arbitration a "collateral attack" on its litigation, designed to decide the issues at the heart of their case without the plaintiffs having a say.

The indigenous groups have argued in part that the remediation agreement with Ecuador's government doesn't release Chevron from environmental claims in lawsuits by third parties, just claims by that country's government.

The lawsuit by the indigenous groups, known as the Lago Agrio case, is ongoing in Ecuador. A new judge was appointed in Ecuador in the Lago Agrio case last month.

Another Ecuadorean judge recused himself last year after Chevron released videos that the company claims show improper dealings by the judge.

The case was originally brought in U.S. District Court in Manhattan in 1993, but the court found the case should be heard in Ecuador. The indigenous groups brought their suit in Ecuador in 2003.

-By Chad Bray, Dow Jones Newswires; 212-227-2017; chad.bray@dowjones.com

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  03-11-10 1237ET
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