Clorox’s claims against Venezuela are dismissed on jurisdiction for lack of “action of investing”

Clorox Spain S.L. v. Bolivarian Republic of Venezuela, PCA Case No. 2015-30

A tribunal in a PCA-administered arbitration conducted in Spanish under the 2010 UNCITRAL Arbitration Rules issued its final award on May 10, 2019 in a case based on the Spain–Venezuela BIT. On jurisdictional grounds, the tribunal dismissed the case against Venezuela initiated by Spanish-based company Clorox Spain S.L. (Clorox) in May 2015.

The underlying dispute and the transfer of shares from Clorox International to Clorox Spain

The award summarized all arguments on issues of merits (paras. 437–781), although the tribunal did not decide them. The claimant’s locally incorporated company, Clorox Venezuela, manufactured cleaning products. Clorox complained against legislative and administrative measures adopted by Venezuela as of November 2011 that curbed Clorox’s ability to establish prices and conduct its business operations. According to Clorox, the measures breached the BIT clauses on FET, full protection and security, and expropriation.

U.S.-based Clorox International was the sole shareholder of Clorox Venezuela from the 1990s, when it was established, until April 2011, when Clorox Spain (the claimant) was constituted and immediately assigned all of Clorox International’s shares in Clorox Venezuela.

Venezuela’s jurisdictional objections

Venezuela presented several objections to jurisdiction: (i) lack of a qualified investor, (ii) lack of a protected investment, (iii) abuse of process and (iv) treaty shopping. The tribunal analyzed only the former two, deciding that Clorox was prima facie an investor, but that its shares were not a protected investment for lack of an “action of investing.”

Venezuela’s objection that Clorox Spain did not qualify as an investor for not having a protected investment

Venezuela alleged that Clorox International was the true investor (para. 210) and that Clorox Spain, a shell company without substantive links to its place of incorporation (paras. 213–216), had not made the investment.

Venezuela emphasized the wording of Article 1(2) of the BIT, which defines investments as assets “invested by investors” (“invertidos por inversores”) (para. 230). According to the respondent’s interpretation, the Spanish word “por” (“by”) would require a link between investor and investment, usually of cause–consequence (para. 226). Invoking Quiborax v. Bolivia, Venezuela argued that mere ownership of shares was insufficient to define an investment, because an “action of investing” was also needed (para. 229).

The respondent also borrowed the Salini test from ICSID case law, arguing it was not fulfilled because Clorox had neither undertaken risk nor made a contribution of capital, assets or know-how.

In turn, Clorox alleged that it qualified as an investor pursuant to the BIT, which only required incorporation in one of the Contracting Parties (para. 334). Clorox argued that Venezuela’s attempt to add requirements to the BIT—substantial business activities in the place of incorporation, for instance—should be rejected, given that those requirements would need to be explicit in the treaty text (para. 335). It asked the tribunal to acknowledge that its ownership of shares in Clorox Venezuela constituted in and of itself a protected investment.

The tribunal’s two-step analysis

As the parties had heavily disputed the burden of proof on issues of jurisdiction, the tribunal remarked that (i) Clorox had the burden of proving personal, subject-matter and temporal jurisdiction (jurisdiction ratione personae, ratione materiae and ratione temporis, respectively), but that (ii) Venezuela had the burden of proving affirmative defences, abuse of process and treaty shopping (para. 785). On the Salini argument, the tribunal briefly mentioned that it considered that discussion not to be relevant to the case (para. 819).

Despite seeing Venezuela’s objections as “two sides of the same coin,” having Article 1(2) of the BIT as common starting point (paras. 786–787), the tribunal addressed them in turn.

First, the tribunal looked into the definition of investor. It sided with Clorox and found that the BIT only required incorporation, not substantive economic activities or other criteria (para. 769). Thus, it held that Clorox prima facie fulfilled the ratione personae requirement to claim BIT protection (para. 797). However, it added that a duly incorporated legal person only becomes a protected investor “if it has made an investment that fulfills the definition of protected investment” (para. 798).

Second, the tribunal concluded that, being the sole shareholder of the locally incorporated company, Clorox prima facie had a protected investment (para. 800). However, relying on the wording of Article 1(2), it added that protection was limited to assets “invested by an investor.” It confirmed that understanding by mentioning other BIT articles, which refer to investments “made” by an investor (“inversiones efectuadas” and “inversiones realizadas”). Accordingly, the tribunal held that the BIT required an “action of investing” (para. 802).

Since nothing in the BIT prevented indirect investment (para. 803; para. 816), the tribunal turned to the issue of whether Clorox had made such “action of investing” (para. 805). It noticed that Clorox’s position conflated having an asset with making an investment, as if there were no distinction between them (para. 808; para. 821), and that Venezuela’s argument on the issue had changed over the course of the arbitration (para. 809).

For the tribunal, there was evidence of an investment in Venezuela, but not of Clorox’s “action of investing,” as required by the BIT (para. 815). Considering that Clorox Spain was constituted on April 25, 2011, with a social capital made of shares transferred to it by Clorox International, the tribunal noted that there was no real exchange in that transaction (para. 830) and that, had it not been for that transfer of shares, Clorox itself would not exist (para. 831). The tribunal concluded that, since there was no “action of investing” on its part, Clorox did not have a protected investment. 

Allocation of costs

Considering UNCITRAL Arbitration Rule 42(1), which provides for a costs-follow-the-event approach, the tribunal decided that Clorox should bear all arbitration costs and reimburse Venezuela’s legal defence costs (approximately. USD 4.5 million) (paras. 845–847).

Notes: The tribunal was composed of Yves Derains (president appointed by the PCA, French national), Bernard Hanotiau (claimant’s appointee, Belgian national) and Raúl E. Vinuesa (respondent’s appointee, Argentinian national). The award of May 10, 2019 is available, in Spanish only, at https://www.italaw.com/sites/default/files/case-documents/italaw10549.pdf. 

Inaê Siqueira de Oliveira is a Master’s candidate in Private Law at University of Sao Paulo.