Venezuela held liable for unlawful expropriation of fertilizer plants
Koch Minerals Sárl and Koch Nitrogen International Sárl v. The Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/19
A tribunal at the International Centre for Settlement of Investment Disputes (ICSID) held Venezuela liable for unlawful expropriation in a case relating to fertilizer plants, awarding over USD 324 million in damages plus interest.
Background and claims
In 1997, Swiss company Koch Minerals Sárl (KOMSA), Venezuelan state-owned company Petroquimica de Venezuela S.A. (Pequiven) and other two companies entered into a series of agreements for the development, construction and operation of two ammonia and two urea plants in José, Venezuela.
On April 8, 1998, a joint investor agreement was executed providing for the incorporation of a series of Venezuelan companies (FertiNitro) to implement the project. On that same day, a 20-year Offtake Agreement (the OA) was concluded. Under the OA, KOMSA and Pequiven agreed to purchase a guaranteed quantity of ammonia and urea produced by FertiNitro at a discounted set price for their own consumption or resale in local or export markets. KOMSA later assigned its rights and obligations under the OA to Koch Oil Marketing S.A., which in turned assigned it to Koch Nitrogen International Sárl (KNI). KOMSA and KNI are associated companies within the Koch group of companies.
From 2005 onward, Venezuela imposed on FertiNitro a series of new taxes and tax increases. In 2007, Venezuelan President Hugo Chávez issued a decree whereby manufacturers, suppliers and exporters of nitrogenous fertilizers were required to supply urea and ammonia on a priority basis to the national market, at a maximum price set by regulation.
On October 10, 2010, President Chávez announced the expropriation of FertiNitro on TV, and an Expropriation Decree was published the next day. One day later, the Venezuelan Minister of Energy and Petroleum visited the plants and stated that Venezuela was already in control of the plants.
KOMSA and KNI initiated arbitration against Venezuela in June 2011 on the basis of the Venezuela–Switzerland bilateral investment treaty (BIT) and the ICSID Convention. They claimed that Venezuela violated BIT Articles 4 (Fair and Equitable Treatment [FET], National Treatment, Full Protection and Security [FPS], Discriminatory Treatment), 6 (Expropriation) and 11 (Umbrella Clause).
On February 28, 2012, by express reference to the Expropriation Decree, Venezuela no longer permitted the sale of urea and ammonia to KNI, and FertiNitro unilaterally terminated the OA.
Tribunal affirms jurisdiction over KNI’s claims
Venezuela challenged the tribunal’s jurisdiction over KNI’s claims relating to the OA, arguing that KNI’s interest in the OA did not constitute an investment under the BIT and the ICSID Convention. Accordingly, in this determination, the tribunal proceeded with a dual test, under both instruments.
The tribunal found that the BIT defines investment as including every kind of asset and that shares or participation in a company and contractual performance are described as assets under the BIT.
When analyzing the definition of investment under the ICSID Convention, the tribunal referred to the CSOB v. Slovakia case to hold that an investment should not be sliced up into pieces to state that one part, standing alone, does not qualify as an investment. Furthermore, the tribunal stated that the OA should not be considered as a separate transaction, unrelated to the project; rather, it should be considered as an integral and essential part of overall investment. Thus, the tribunal concluded that the entire transaction was part of a single integrated investment within the meaning of ICSID Convention Article 25(1).
Based on the above, the tribunal concluded that KNI’s interest in the OA constituted an investment under both the BIT and the ICSID Convention.
Venezuela unlawfully expropriated KOMSA and KNI’s investments
KOMSA and KNI argued that the Expropriation Decree and the Minister’s declarations constituted an unlawful indirect expropriation. In turn, Venezuela alleged that the Expropriation Decree ordered the mandatory acquisition of FertiNitro’s assets pursuant to Venezuela’s local laws and in compliance with BIT Article 6 (Expropriation) and that the termination of the OA was a commercial decision, which could not be qualified as an expropriation under the BIT.
To analyze the expropriation claim, the tribunal referred to the four-prong test established in Article 6 of the BIT. According to the test, expropriation is prohibited unless the following are satisfied: (i) the measure must be taken in the public interest, (ii) on a non-discriminatory basis, (iii) under due process of law and (iv) provided that provisions be made for effective and adequate compensation.
In the tribunal’s view, KOMSA and KNI failed to prove that (i) the measures were not taken in the public interest, and (ii) that they were discriminatory. The tribunal disagreed with the claimants that Venezuela was required to give them advance notice of the Expropriation Decree and found that (iii) the expropriation was carried out in accordance with due process of law.
As to (iv) compensation, the tribunal noted that KOMSA did not receive any compensation from Venezuela, even more than seven years after the Expropriation Decree. Accordingly, the tribunal held that Venezuela unlawfully expropriated KOMSA’s interest in FertiNitro on October 11, 2010. It considered that the expropriation was indirect because no formal transfer of ownership of FertiNitro’s assets under local law occurred until July 2011, but that it had the effect of a direct expropriation on October 11, 2010.
The tribunal carried out a separate analysis of KNI’s interest as a successor of KOMSA in the OA. The majority of the tribunal considered that KOMSA’s investment and the OA formed a unified package, that KOMSA’s investment would have not taken place without the OA and that KNI’s investment could not be sliced off and isolated. Accordingly, the majority decided that Venezuela also unlawfully and indirectly expropriated KNI’s interest in the OA on October 11, 2010, in violation of BIT Article 6.
Other claims dismissed
KOMSA also presented claims for losses derived from new and increased taxes, non-payment or late payment of tax credits, effects of the measures adopted in 2007 concerning priority supply to national markets and interference with FertiNitro’s business. However, the tribunal dismissed all non-expropriation claims because there was not enough evidence that KOMSA, as a minority shareholder of FertiNitro (25 per cent), suffered a loss sufficiently quantifiable in money from any of the allegations above, and that any of the losses suffered by FertiNitro were passed through to KOMSA.
Compensation and interest
The tribunal ordered Venezuela to pay KOMSA damages of USD 140.25 million. By majority, it also ordered it to pay USD 184.8 million to KNI. Both amounts were calculated as at October 10, 2010. In addition, the tribunal ordered Venezuela to pay pre-award interest (from October 11, 2010 to the date of the issue of the award) and post-award interest (from the date of issue of the award until payment), in both cases calculated at USD 6-month LIBOR plus 2 per cent, compounded with 6-month rests.
Dissenting opinion
Arbitrator Zachary Douglas dissented on the tribunal’s finding that Venezuela expropriated KNI’s interest in the OA. In his view, the Expropriation Decree could only produce effects in the Venezuelan legal system and could not deprive KNI of its intangible property rights under New York law, the governing law of the OA. He stated that KNI’s rights under the OA remained valid and binding even after the Expropriation Decree and that KNI could enforce them by invoking the arbitration clause of the OA.
Notes: The tribunal was composed of V.V. Veeder (president, appointed by the parties, British national), Marc Lalonde (claimants’ appointee, Canadian national) and Zachary Douglas (respondent’s appointee, Australian national, replacing Florentino Feliciano, Philippine national). The award of October 19, 2017 is available in English at https://www.italaw.com/sites/default/files/case-documents/italaw9397.pdf.
Claudia Arietti is a Paraguayan attorney and holds an LL.M from New York University School of Law.
