Whatever your opinion of Venezuelan president Hugo Chávez’s economic policies, you can’t dispute that they have been a gift for lawyers.
Crossborder lawsuits filed against Venezuela by jilted foreign investors have spiked as the government has nationalised industries and revised contracts. And, wherever possible, foreigners are detouring around Venezuela’s courts and resorting to international arbitration.
Venezuela has signed a large number of investment protection treaties with other countries, and these typically provide for mandatory arbitration of FDI disputes. Another legal avenue for foreign investors is to rely on Venezuela’s foreign investment law, a domestic statute passed into law in 1999, offering key protections for foreign investors.
Depending on whom you ask, the 1999 law contains a promise by Venezuela to submit to binding international arbitration.
However, the government hotly disputes this reading of the ambiguously worded law. Lawyers for the state insist that the statute simply leaves open the possibility that Venezuela might agree to take a particular dispute to arbitration.
At the moment, several different panels of international arbitrators are weighing the meaning of the contested clause. Already, one panel has weighed in, and rendered a (limited) set-back for Exxon-Mobil in a $6bn claim arising out of the nationalisation of oil rights in Venezuela.
In a June ruling, three arbitrators sitting at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) held that the wording of the law’s arbitration clause was “ambiguous and obscure”. However, after studying Venezuela’s historical posture towards arbitration of disputes with foreign investors, the arbitrators were not convinced that the government intended for the law to serve as an automatic gateway to international arbitration.
While this ruling was a set-back for Exxon-Mobil – likely preventing the company from arbitrating certain tax and royalty disputes outside of the country – it will not halt a claim for the outright nationalisation of the US company’s rights to oil production in Venezuela’s Orinoco Belt.
Exxon was able to persuade the same arbitration panel that it can mount a nationalisation claim under a treaty between the Netherlands and Venezuela. Evidence showed that as tensions arose between Exxon and Venezuela over taxes and royalties, the US company reshuffled its corporate ownership of the Venezuelan assets so that they were held by Dutch entities.
This corporate sleight-of-hand came too late to allow the US company to invoke the treaty in the face of tax and royalty hikes, but it came before Venezuela nationalised Exxon’s investments. Accordingly, Exxon can argue in the next phase of the arbitration that the Dutch treaty requires that the company be compensated for a nationalisation of these “Dutch” investments.
The lessons of the Exxon case for other foreign investors are harder to judge.
Companies seeking to rely on the 1999 domestic investment law remain hopeful that different groups of arbitrators may take a more investor-friendly reading of that law’s arbitration provisions. International arbitration panels are under no strict duty to follow earlier rulings. So, it is possible that conflicting interpretations of the law will be seen in the months to come.
However, a more reliable form of protection may be found in the dozens of international treaties signed by Venezuela on a bilateral basis, such as the Dutch agreement. Some foreign investors whose home countries do not have a treaty with Venezuela structured their holdings so that they fell under the protective umbrella of another country’s treaty with Venezuela.
However, where such restructurings were initiated after particular disputes began to arise with Venezuela, arbitrators – as in the Exxon case – may rule that those existing disputes (but not future ones) are not eligible to be arbitrated.
Luke Peterson is the editor of Investment Arbitration Reporter, an electronic news service monitoring the international legal framework protecting FDI: http://www.iareporter.com