US establishes new Venezuela sanctions regime and imposes sanctions on Venezuelan officials

On Monday, 9 March 2015, President Obama signed an executive order declaring a national emergency to deal with the threat to US national security and foreign policy posed by “the Government of Venezuela’s erosion of human rights guarantees, persecution of political opponents, curtailment of press freedoms, use of violence and human rights violations and abuses in response to antigovernment protests, and arbitrary arrest and detention of anti-government protestors, as well as the exacerbating presence of significant public corruption.” Continue reading

Flughafen Zürich A.G. and Gestión e Ingenería IDC S.A. v. Bolivarian Republic of Venezuela: when can multiple claimants bring claims under separate BITs in one set of proceedings?

This is the second of two posts discussing the recent award in Flughafen Zürich A.G. and Gestión e Ingenería IDC S.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/19. The previous post was published on Thursday last week and it dealt with Venezuela’s objection that Flughafen was a government instrumentality of the Swiss State.  In this post we will discuss Venezuela’s allegation that it did not consent to the Claimants bringing two claims under different BITs in one set of proceedings.

The tribunal’s decision is notable because it upholds the right of multiple claimants to bring joint proceedings under different instruments without the need for the host state’s specific consent to such form of proceedings.

Background

As we reported previously, the arbitral proceedings were brought by Flughafen Zürich A.G. (“Flughafen”), a company incorporated under the laws of Switzerland, and Gestión e Ingenería IDC S.A. (“IDC”), a Chilean corporation. The Claimants had formed a consortium to administer, manage and operate the Isla Margarita airport under a contract with the state of Nueva Esparta. The arbitral tribunal found Venezuela liable for breaching both BITs on the ground of expropriation and denial of justice.

Lack of consent to the consolidation of claims

In bringing the claim, Flughafen relied upon the Venezuela-Switzerland BIT, while IDC relied upon the Venezuela-Chile BIT. Venezuela contended that by doing so the Claimants unduly consolidated their claims in circumstances that Venezuela did not consent to such consolidation. According to Venezuela, the two BITs upon which the Claimants relied contained arbitration provisions which were incompatible, and without Venezuela’s consent, consolidation could not be available. In addition, Venezuela argued that the substantive provisions of each BIT were different.

The arbitral Tribunal began its analysis by reframing the issue to be decided. The Tribunal observed that “consolidation is the joinder of separate proceedings on the basis of common questions of law or fact in the underlying dispute”. In this arbitration, however, the Claimants brought their case jointly right from the outset. There were never two proceedings but just one.

The relevant question was, therefore, whether the Claimants were entitled to bring a joint claim where they rely on different BITs but have made a joint investment and have suffered damages as a result of the same set of facts.

The Tribunal noted that although neither BIT explicitly authorised joint claims, there is no prohibition. Nor does the ICSID Convention or the ICISD Arbitration Rules bar joint claims. In this case, the Claimants shared a single version of the facts, invoked essentially the same rights, and it was “reasonable” to settle their claims in a single arbitration, reducing costs and the risk of contradictory decisions.

The Tribunal saw no reason why the Claimants should be forced to pursue their claims in separate proceedings. Consequently, the Tribunal dismissed Venezuela’s objection and allowed the Claimants to proceed jointly.

This conclusion is of interest because it acknowledges the right of multiple claimants to bring joint proceedings under different instruments without the need to obtain the state’s specific consent to such form of proceedings. This is a convenient route for investors of different nationalities, protected under different BITs, which have embarked upon a joint project and have suffered damages as a result of the host state’s actions.

For further information, please contact Iain Maxwell, Of Counsel, or your usual Herbert Smith Freehills contact.

Iain Maxwell
Iain Maxwell
Of Counsel
+44 20 7466 2646

Flughafen Zürich A.G. and Gestión e Ingenería IDC S.A. v. Bolivarian Republic of Venezuela: when may an entity be considered a “governmental instrumentality”?

On 18 November 2014, an ICSID Tribunal in Flughafen Zürich A.G. and Gestión e Ingenería IDC S.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/19, held Venezuela liable for breaching its BITs with Chile and Switzerland on the ground of expropriation and denial of justice. In doing so, the Tribunal considered and rejected a number of jurisdictional challenges by Venezuela. In this post, we will discuss one of them – Venezuela’s objection that Flughafen was a government instrumentality of the Swiss State and, as such, Flughafen was prevented from bringing claims under the ICSID Convention.

The tribunal’s decision is of interest because it provides a useful test to ascertain whether an entity may be considered a “governmental instrumentality” under article 25 of the ICSID Convention.

Background

The arbitral proceedings were brought by Flughafen Zürich A.G. (“Flughafen”), a company incorporated under the laws of Switzerland, and Gestión e Ingenería IDC S.A. (“IDC”), a Chilean corporation. The Claimants had formed a consortium to administer, manage and operate the Isla Margarita airport under a contract with the state of Nueva Esparta.

Flughafen’s status

Venezuela contended that the arbitral Tribunal lacked jurisdiction ratione personae because Flughafen was not a “national of another contracting state” as required by Article 25 of the ICSID Convention but a governmental instrumentality of the Swiss state. Venezuela argued that the public nature of Flughafen was supported by two key facts: first, the Canton of Zurich was one of the shareholders in Flughafen and, second, Flughafen was engaged in essentially governmental activities, namely the control of the air space in Switzerland.

The Tribunal confirmed that article 25 of the ICSID Convection envisages an investor bringing a claim against a host state. States are not allowed to bring claims against one another under the ICSID Convention. The Tribunal observed that doubts may come up where the investor is not the State itself but an entity belonging to or controlled by a State.

Both parties relied in their submission on a passage written by Aaron Broches, former ICSID’s Secretary-General and one of the architects of the ICSID Convention, in his 1972 General Course at The Hague Academy of International Law.

“[I]n today’s world, the classical distinction between private and public investment, based on the source of the capital, is no longer meaningful, if not outdated. There are many companies which combine capital from private and governmental sources and corporations all of whose shares are owned by the government, but who are practically indistinguishable from the completely privately owned enterprise both in their legal characteristics and in their activities. It would seem, therefore, that for purposes of the Convention a mixed economy company or government-owned corporation should not be disqualified as “a national of another Contracting State” unless it is acting as an agent for the government or is discharging an essentially governmental function.”

The Tribunal adopted Broches’ analyses. It first noted that Flughafen was a corporation incorporated in Switzerland and therefore it had to be considered prima facie a national of another contracting state. But Flughafen was also a “mixed economy company” because the Canton of Switzerland, a subdivision of that State, was a shareholder. Therefore, the Tribunal considered that the issue to be decided was whether Flughafen was acting as an agent of the Swiss state and/or was performing essentially governmental functions.

The Tribunal held that Flughafen was not an agent because it did not act on behalf or for the benefit of Switzerland; more than 60% of Flughafen was owned by private shareholders and the Canton did not have control over the board of directors; Flughafen was listed in the SIX Swiss Exchange and Flughafen’s corporate purpose was to create value rather than defending the public interests of Switzerland.

The Tribunal then concluded that Flughafen’s activities could not be considered as governmental. Contrary to Venezuela’s assertions, the Tribunal found that Flughafen was not engaged in the control of Switzerland’s airspace. Its business was rather the management and operation of airports around the world. This is not an “essentially governmental function” because it does not falls within what the Tribunal described as a State’s “core non-delegable public activities”. Rather, the management of an airport is something that can be committed to private parties. That was what had happened when the state of Nueva Esparta decided to engage the Consortium in the administration of the Isla Margarita airport.

The tribunal’s reasoning provides a useful test to consider whether an entity owned or controlled by a state qualifies as a governmental instrumentality and therefore does not qualify as a “national of another contracting State” able to bring a claim under Article 25 of the ICSID Convention. This decision is likely to have an impact on future cases brought by state-related entities.

For further information, please contact Iain Maxwell, Of Counsel, or your usual Herbert Smith Freehills contact.

Iain Maxwell
Iain Maxwell
Of Counsel
+44 20 7466 2646

 

Exxon Mobil is awarded US$1.6 billion in ICSID claim against Venezuela – to be set off against award in parallel contractual arbitration

On 9 October 2014, a tribunal of H.E. Judge Gilbert Guillaume (President), Professor Kaufmann-Kohler and Dr. Ahmed Sadek El-Kosheri rendered a final Award on the case Venezuela Holdings and others v. the Bolivarian Republic of Venezuela, ICSID Case NO. ARB/07/27.

Five subsidiaries of Mobil Corporation (the “Claimants”) initiated the arbitration in 2007 claiming compensation for Venezuela’s alleged breaches of the Netherlands-Venezuela BIT in relation to a series of state actions which affected the Claimants’ investments in the Cerro Negro Project in the Orinoco Belt and the La Ceiba Project adjacent to Lake Maracaibo.

After 7 years of proceedings the Tribunal ordered Venezuela to pay to the Claimants: (i) US$9,042,482 in compensation for the production and export curtailments imposed on the Cerro Negro Project; (ii) US$1,411.7 million in compensation for the expropriation of their investments in the Cerro Negro Project; and (iii) US$179.3 million in compensation for the expropriation of their investments in the La Ceiba Project. The compensation amount is much closer to the valuations put forward by Venezuela in the arbitration, than the US$ 16.6 billion requested by the Claimants.

Of particular note in the Award is the Tribunal’s finding that Venezuela’s expropriation of Claimants’ assets was lawful. Even when no compensation was paid, the Tribunal concluded that: the expropriation was conducted in accordance with due process; it was not carried out contrary to undertakings given to the Claimants; and the Claimants did not establish that the offers made by Venezuela were incompatible with the “just” compensation requirement of Article 6(c) of the BIT.

This approach contrasts with the decision of the majority of the tribunal hearing a similar claim against Venezuela brought by ConocoPhillips (ConocoPhillips Petrozuata B.V., ConocoPhillips Hamaca B.V. and ConocoPhillips Gulf of Paria B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/30). In that case, the majority found that the expropriation was unlawful because Venezuela did not approach negotiations with ConocoPhillips in good faith and it only offered book-value, rather than fair market value compensation for the assets (Decision on Jurisdiction and Merits dated 3 September 2013).

There are a number of open questions about the level of compensation payable following an illegal expropriation as compared to a legal expropriation. In this case the Claimants submitted that the expropriation was unlawful and that, as a consequence, Venezuela was under the obligation to make full reparation for the damages caused, in conformity with international law. By contrast, Venezuela contended that even if the expropriation were deemed to be unlawful the indemnity to be paid to the Claimants must represent the market value of the investment at the date of the expropriation. The Tribunal decided that since it had found that the expropriation was lawful it did not need to consider the standard for compensation in case of unlawful expropriation or whether it would differ from the standard for compensation to be paid in case of lawful expropriation. It held that the compensation must be calculated in conformity with the requirements of the BIT which required “just compensation” and that “just compensation” should represent the market value of the investments affected immediately before the measures were taken. Therefore, it employed the date of the expropriation of Claimants’ assets (June 2007) as the valuation date, which had considerable significance in the amount of compensation since the market price of oil increased in the years that followed the expropriations.

The Tribunal also grappled with the parties’ respective cases on whether a risk of confiscation is part of the country risk that is taken into account in determining the discount rate for the purposes of valuing the assets using the Discounted Cash Flow Method. The Tribunal concluded that a confiscation risk remains part of the country risk and must be taken into account in the determination of the discount rate.

To avoid double-recovery, the Tribunal held that the amount already received by the Claimants under a parallel ICC Award should be discounted to the total compensation payable to the Claimants.

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No consent to ICSID jurisdiction found under Venezuelan Investment Law: distinction drawn between the intention of the drafters and the intentions of the State

In OPIC Karimun Corporation v Venezuela, an ICSID tribunal has held that Venezuela’s Investment Law’s reference to ICSID did not, without more, provide consent to ICSID jurisdiction. Due to the ambiguous wording of the law, the tribunal looked at the intention of Venezuela and was unable to conclude that it had intended to provide consent. This was despite evidence from one of the drafters of the law that he had intended the relevant provision of the law to constitute such consent. The Tribunal drew a distinction between the intention of the drafters, and the intention of the State.

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President Hugo Chavez’s Legacy: What Future for Investors in Venezuela?

Overnight the Venezuelan government has confirmed the death of President Hugo Chavez after a long battle with cancer.

President Chavez had been a constant force in Latin America since he came to power in 1999, and his impact on foreign investors in Venezuela has been significant, as has been his impact on numerous other countries in the region.

A polemic figure who advocated a revolutionary style of socialism, President Chavez undertook a diverse campaign of expropriation, which affected various industry sectors.  This led to numerous investor-State arbitration claims being commenced against Venezuela, and most recently led to the country denouncing the ICSID Convention in January 2012.  The ICSID Convention establishes a unique multilateral regime which facilitates the protection of foreign investors’ international rights – not least by establishing a process for international arbitration.

Beyond Venezuela’s borders, President Chavez was a staunch supporter and pioneer of what have become known as “ALBA” states (notably Venezuela, Bolivia, Ecuador, Nicaragua and certain others).  Together, these countries have adopted a stance which seeks to establish a counter-balance to what is perceived to be the influence of capital exporting countries such as the United States and Europe.  That stance manifested itself most clearly in the denunciation of the ICSID Convention, which was first undertaken by Bolivia in 2007, and followed by Ecuador in 2009.

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Venezuela follows Bolivia and Ecuador with plans to denounce ICSID Convention

On 14 January 2012, Venezuela’s Energy Minister, Rafael Ramírez, and president of state-owned oil utility PDVSA, announced the country’s intention to withdraw from ICSID and renegotiate 25 bilateral investment treaties (BITs). To be effective, Venezuela will have to formally communicate its withdrawal to the World Bank. This has yet to happen.

In 2007 Bolivia became the first country to denounce the ICSID Convention, followed in 2009 by Ecuador. Venezuela’s announcement has been long-awaited and it will not come as news to the international community. However, there remains uncertainty as to the consequences of such a denunciation – particularly for investors with potential disputes in the region.

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Venezuela – international tribunal confirms that Article 22 of the Venezuelan Investment Law does not constitute consent to ICSID arbitration

At the end of December 2010, in a decision that will be of interest to international companies doing business in Venezuela, an ICSID tribunal in the case of Cemex v. Venezuela (ICSID Case No. ARB/08/15) concluded that it did not have jurisdiction over claims brought pursuant to Venezuela’s Investment Law. The tribunal concluded however that it did have jurisdiction over claims brought by the claimant companies pursuant to the Netherlands/Venezuela Bilateral Investment Treaty.

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