Netherlands/Venezuela BIT protects indirect investors but no consent to ICSID arbitration under Venezuelan Investment Law

Practical Law UK Legal Update Case Report 1-504-4611 (Approx. 6 pages)

Netherlands/Venezuela BIT protects indirect investors but no consent to ICSID arbitration under Venezuelan Investment Law

by Iain Maxwell, Herbert Smith LLP

Background

Article 25(1) of the ICSID Convention provides:

"The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally."

For further details on Article 25 generally, see Practice note, Investment treaty arbitration: legal issues.

Article 22 of the Venezuelan Investment Law was translated by the tribunal in this case as follows:

"Disputes arising between an international investor whose country of origin has in effect with Venezuela a treaty or agreement on the promotion and protection of investments, or disputes to which the provisions of the Convention establishing the Multilateral Investment Guarantee Agency (OMGI-MIGA) or the Convention on the Settlement of Investment Disputes between States and nationals of other States (ICSID) are applicable, shall be submitted to international arbitration according to the terms of the respective treaty or agreement, if it so provides, without prejudice to the possibility of making use, when appropriate, of the dispute resolution means provided for under the Venezuelan legislation in effect."

Article 1(a) of the 1991 Agreement on Encouragement and Reciprocal Protection of Investments entered into by the Kingdom of the Netherlands and the Republic of Venezuela (BIT) provides that:

"For the purposes of this Agreement: a. the term "investment" shall comprise every kind of assets and more particularly though not exclusively: …

(ii) rights derived from shares, bonds, and other kinds of interests in companies and joint ventures …"

Facts

The first claimant, Cemex Caracas Investments BV, and its wholly owned subsidiary, the second claimant, Cemex Caracas II Investments BV, were both incorporated in the Netherlands.

Cemex Caracas II owned 100% of the shares in a Cayman Islands company, Vencement Investments, which in turn owned 75.7% of the shares in Cemex Venezuela (CemVen), a cement company incorporated and operating in Venezuela.

The claimants brought an ICSID arbitration claim under the BIT, with reference also to the Venezuelan Investment Law, alleging that Venezuela nationalised CemVen without paying any compensation. The claimants sought to establish the tribunal's jurisdiction to hear their claims on the basis of the BIT and reserved their right to also rely on the Venezuelan Investment Law.

Venezuela challenged both arguments. It contested jurisdiction under the BIT on the basis that it did not cover indirect investors, and under the Venezuelan Investment Law on the basis that Article 22 of that Law did not provide the requisite consent to ICSID arbitration required by Article 25 of the ICSID Convention.

In relation to the BIT, Venezuela sought to distinguish between:

Investments, which it accepted could be direct or indirect.
Investors, who it argued must hold their investments directly.

Venezuela argued that, applying the terminology of the BIT, the investment concerned must be an investment "of" the claimants, and that due to the investment being held through the intervening Cayman Islands company, the investment in CemVen was not an investment "of" the claimants.

Decision

The tribunal concluded that it did have jurisdiction under the BIT, but not under the Venezuelan Investment Law.

Jurisdiction under the BIT

The tribunal recalled a number of previous awards which had concluded that indirect investments were sufficient to found jurisdiction, including Siemens v Argentina (ICSID Case No ARB/02/8), Ioannis Kardassopoulos v Georgia (ICSID Case No ARB/05/18) and Tza Yap Shum v Peru (ICSID Case No ARB/07/6) and Mobil v Venezuela (ICSID Case No ARB/07/27).

It then rejected Venezuela's arguments, stating that:

"By definition, an indirect investment is an investment made by an indirect investor. As the BIT covers indirect investments, it necessarily entitles indirect investors to assert claims for alleged violations of the Treaty concerning the investments that they indirectly own."

The tribunal found that where the BIT referred to investments "of" nationals of the other party, it meant that those investments must belong to such nationals. However, this did not mean that they must be "directly" owned by those nationals. Indirect ownership, such as that of the claimants in CemVen, was sufficient.

Jurisdiction under the Venezuelan Investment Law

The claimants also argued that Venezuela's consent to ICSID arbitration was also expressed in Article 22 of the Venezuelan Investment Law. The tribunal's reasoning and conclusion on this point was similar to that of the tribunal in Mobil v Venezuela (ICSID Case No ARB/07/27) (discussed in Legal update, Interpretation of national legislation in ICSID arbitration), which also addressed Article 22 in its jurisdictional decision of June 2010 (perhaps unsurprising given that the same arbitrator, Judge Gilbert Guillaume, acted as president of both tribunals).

Standard of interpretation

The tribunal first had to determine the standard of interpretation it should apply to Article 22. The claimants argued that the question of whether Article 22 constituted a "consent" to arbitration was a question of international law, while Venezuela argued that, as it formed part of the law of Venezuela, Article 22 must be interpreted in the light of Venezuelan legal principles.

The tribunal noted first that, under Article 41(1) of the ICSID Convention, it was "judge of its own competence", and therefore the interpretation given to Article 22 by the Venezuelan authorities or by Venezuelan courts could not control the tribunal's decision on its own competence.

On the issue of whether Article 22 should be interpreted according to Venezuelan or international rules of interpretation, the tribunal noted that ICSID case law on the point "is rare and lacks consistency". Having examined that case law, the tribunal concluded that the hesitations of ICSID tribunals on the question stemmed from the fact that, in the cases examined, a state's alleged consent to arbitration was not contained in a treaty, which would have fallen to be interpreted according to the Vienna Convention on the Law of Treaties of 1969, but in a unilateral offer made by the state in one form or another.

The tribunal drew analogy with a number of cases before the International Court of Justice (ICJ) where the ICJ had been required to interpret unilateral declarations by states under Article 36(2) of its Statute. The tribunal adopted the analysis of the ICJ on the issue of the standard to be applied, concluding that:

"Unilateral acts by which a State consents to ICSID jurisdiction are standing offers made by a sovereign State to foreign investors under the ICSID Convention. Such offers could be incorporated into domestic legislation or not. But, whatever may be their form, they must be interpreted according to the ICSID Convention and to the principles of international law governing unilateral declarations of States."

Content of international law standard

Having concluded that it must apply international law principles, the tribunal considered what those principles entailed. It noted that while customary rules governing states' unilateral declarations in international law have never been codified, the International Law Commission has drawn a basic distinction between:

Declarations formulated in the framework and on the basis of a treaty.
Other declarations made by states in the exercise of their freedom to act on the international plane.

While both may create international obligations, in relation to the latter extreme caution is needed to decide if those declarations create such obligations. However, interpretation is treated differently when, as here, the unilateral declaration is formulated in the framework and on the basis of a treaty.

The tribunal referred to a series of ICJ cases interpreting unilateral declarations of compulsory jurisdiction made under the framework of Article 36(2) of the ICJ's Statute, and concluded that the ICJ interprets such declarations "in a natural and reasonable way, having due regard to the intention of the State concerned". If the text is not clear, the court will look at the relevant context and evidence regarding the preparation and purpose of the declaration. The intention of the state must prevail and can only be defeated by a fundamental defect which vitiates the instrument by failing to conform to a mandatory legal requirement.

Applying these rules to the Venezuela Investment Law, the tribunal was unable to conclude from what it felt was the "obscure and ambiguous" text of Article 22 that Venezuela consented unilaterally to ICSID arbitration for all disputes covered by the ICSID Convention in a general manner. The tribunal therefore concluded that Article 22 did not provide a basis for its jurisdiction.

Comment

The tribunal's approach to the question of whether indirect investors, as well as indirect investments, are protected by the BIT is a sensible one. The consistency with which tribunals have concluded that indirect investments are protected by such BITs brings some welcome predictability to the issue and to parties wishing to know whether or not their investments are protected.

The tribunal's rejection of the claimants' attempts to also bring their claims within the ambit of the Venezuelan Investment Law highlights the importance of the consent requirement in establishing ICSID jurisdiction, and emphasises that clear evidence of such consent by a state will be required. Although there is no system of precedent in investment arbitration, this decision will make it harder for other investors in Venezuela to found an international arbitration claim on the basis of the Venezuelan Investment Law alone.

Case

Cemex Caracas Investments BV and Cemex Caracas II Investments BV v Bolivarian Republic of Venezuela (ICSID Case No ARB/08/15).

Netherlands/Venezuela BIT protects indirect investors but no consent to ICSID arbitration under Venezuelan Investment Law | Practical Law