Looking to Venezuela’s Investment Law, majority finds that Venoklim was not a foreign investor and dismisses case against Venezuela; claimant-appointed arbitrator dissents

Venoklim Holding B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/22

The majority of a tribunal at the International Centre for Settlement of Investment Disputes (ICSID) dismissed an expropriation case against Venezuela on jurisdictional grounds, finding that the investor did not qualify as a foreign national under Venezuela’s Investment Law. The award was rendered on April 3, 2015.

Background and decision to bifurcate

By Decree No. 7712 of 2010, Venezuela ordered the forced acquisition of the assets of five companies owned and controlled by Venoklim Holding B.V. (Venoklim), incorporated in the Netherlands. According to the Decree, the acquisition would be essential for Venezuela’s autonomy in the production of certain lubricants.

Based on Venezuela’s Investment Law and the ICSID Convention, Venoklim initiated arbitration in July 2012 on expropriation claims. It was only in September 2013, when presenting its counter-memorial to Venezuela’s jurisdictional objections, that Venoklim expressly referred to the Venezuela–Netherlands bilateral investment treaty (BIT). The tribunal decided to bifurcate the arbitration, dealing first with Venezuela’s jurisdictional objections and leaving the matters for a later stage.

Venezuela’s denunciation of the ICSID Convention effective after six months

Recalling that it denounced the ICSID Convention on January 24, 2012, Venezuela argued that the tribunal did not have personal jurisdiction. It read ICSID Convention Article 72 to mean that valid consent would only exist if the arbitration request had been received before the notice of denunciation. In response, Venoklim maintained that, under ICSID Convention Article 71, Venezuela’s denunciation would only be effective six months after receipt of the notice of denunciation, and pointed out that the arbitration was initiated before the six months lapsed.

The tribunal rejected the objection, disagreeing with Venezuela’s interpretation of Article 72. According to the tribunal, this interpretation would give Venezuela’s denunciation immediate effect, disregarding the six-month period provided for by Article 71. It would also violate the principle of legal security, to the detriment of investors.

Date when the arbitration request is presented—not registered by ICSID—is the relevant date to establish investor’s consent

Venezuela objected that, when the dispute was registered on August 15, 2012 and the proceeding began, it was no longer a party to the ICSID Convention, even considering the six-month period under Article 71. For Venoklim, however, the registration of the dispute by the ICSID Secretariat is a mere administrative measure, and consent had already been perfected when the request was presented on July 23, 2012. The tribunal sided with Venoklim, concluding that the relevant date for establishing jurisdiction is the date when the investor gives consent by presenting the request, not the date when ICSID registers it.

Venezuela’s Investment Law is not an independent basis for ICSID jurisdiction

Venezuela argued that Article 22 of its Investment Law is not an open and general offer to arbitrate, based on the provision’s ordinary meaning, on political declarations made when the law was enacted, and on comparisons between the provision and offers to arbitrate contained in Venezuelan BITs and in ICSID model clauses. According to Venoklim, the provision implicitly incorporates the BIT and constitutes an independent jurisdictional basis.

After it analyzed the spirit, context and purpose of the provision and the circumstances under which it was drafted, the tribunal concluded that the provision served to confirm Venezuela’s offers to arbitrate made under other legal instruments, such as BITs—but could not be considered an “independent, clear and general” offer to arbitrate (para. 104). Accordingly, it dismissed the objection, in line with earlier ICSID decisions in the Mobil, Cemex, Brandes, Tidewater, OPIC and ConocoPhillips cases.

BIT not an independent jurisdictional basis—but incorporated by indirect reference in Venezuela’s Investment Law

Venezuela claimed that the late invocation of the BIT—not in the request, but later, in the counter-memorial—breached the ICSID Convention and procedural rules, which require that the request must present all the elements necessary to establish jurisdiction.

The tribunal agreed with the investor that there was no late invocation. It reasoned that the counter-memorial merely explained and elaborated on the jurisdictional basis presented in the request—the Investment Law. Article 22 of the Investment Law refers to international arbitration provided for in investment treaties generally. Since Venoklim claimed to be a Dutch investor, the tribunal held that the reference to investment treaties in Venezuela’s law should be read, in this case, as a reference to the Venezuela–Netherlands BIT.

Adopting the effective control criterion under the Investment Law, tribunal finds that Venoklim is not a foreign investor

To demonstrate its foreign nationality, Venoklim invoked the incorporation criterion (referred to in the BIT), but Venezuela argued that the effective control criterion (referred to in the Investment Law) should be used instead. According to Venezuela, the effective control over Venoklim ultimately lay with a Venezuelan company. Therefore, the investor could not be considered foreign nationals under the ICSID Convention, the Investment Law or the BIT.

The majority of the tribunal emphasized that Venoklim needed to fulfill the requirements of Article 22 of the Investment Law to benefit from the BIT, as well as to prove its foreign nationality under the ICSID Convention.

Analyzing Article 22, the majority noted that the provision refers to “ownership” and “control,” but not “incorporation,” as the relevant criteria to determine nationality. Therefore, it held that the investor’s place of incorporation was irrelevant in this determination and, given that the parties had not discussed ownership, it focused on analyzing the control criterion. In this analysis, it found that Venoklim was indeed controlled by a Venezuelan company, which in turn was owned and controlled by Venezuelan nationals.

Finding that Venoklim did not qualify as a foreign investor under Article 22, the majority held that the investor was not entitled to the protections of the provision and, as a consequence, could not benefit from the protections of the BIT either. Accordingly, the majority of the tribunal dismissed the case for lack of jurisdiction.

Briefly analyzing the ICSID Convention, the majority reasoned that to look solely at Venoklim’s incorporation in the Netherlands to consider it a foreign investor, even though the investment was ultimately owned by Venezuelans, “would be to allow formalism to prevail over reality and to betray the object and purpose of the ICSID Convention” (para. 156).

According to arbitrator Enrique Gómez Pinzón, the majority was mistaken to analyze the investor’s nationality based on the Investment Law. Given the earlier conclusion that Article 22 could not be considered an “independent, clear and general” offer to arbitrate, but merely confirmed Venezuela’s commitments under investment treaties, he argued that the investor should have been subjected to the nationality requirements of the BIT.

The dissenting arbitrator also disagreed with the majority’s interpretation of the nationality requirements under the ICSID Convention. According to him, the ICSID Convention is silent on a definition of nationality to give the contracting parties leeway to choose a nationality criterion in more specific instruments. In the Venezuela–Netherlands BIT, the two contracting parties chose “incorporation” as the applicable criterion, but the majority disregarded that choice. He also criticized the majority’s decision to pierce Venoklim’s corporate veil without a detailed analysis of whether its incorporation in the Netherlands had been fraudulent or done to evade legal requirements or to harm the shareholders or third parties.

Case dismissed—but Venezuela ordered to cover half of arbitration costs and own legal fees

Even though Venezuela demonstrated that Venoklim was not a foreign investor, leading to a dismissal on jurisdictional grounds, the tribunal reasoned that, since most of Venezuela’s jurisdictional objections were rejected and since Venoklim acted correctly throughout the proceedings, “it would be unfair” (para. 163) for Venoklim to bear all costs. Accordingly, the tribunal ordered Venezuela to bear half of the arbitration costs, including the arbitrators’ fees, and ordered each party to cover its own legal fees and expenses.

Notes

The ICSID tribunal was composed of Yves Derains (President appointed by the Chairman of the Administrative Council, French national), Enrique Gómez Pinzón, (claimant’s appointee, Colombian national) and Rodrigo Oreamuno Blanco (respondent’s appointee, Costa Rican national). The award is available, in Spanish only, at http://www.italaw.com/sites/default/files/case-documents/italaw4229.pdf; the concurring and dissenting opinion, also in Spanish only, at http://www.italaw.com/sites/default/files/case-documents/italaw4230.pdf.

Author

Martin Dietrich Brauch is an International Law Advisor and Associate of IISD’s Investment for Sustainable Development Program, based in Latin America.