Venezuela ordered to pay US$1.202 billion plus interest to Canadian mining company Crystallex for FET breach and expropriation

Crystallex International Corporation v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2

In a 273-page award dated April 4, 2016, a tribunal at the Additional Facility (AF) of the International Centre for Settlement of Investment Disputes (ICSID) ordered Venezuela to pay US$1.202 billion plus interest to Canadian company Crystallex International Corporation (Crystallex). The tribunal considered that the denial of Crystallex’s environmental permit and the termination of its mining contract, among other actions by Venezuela, amounted to a high-level political agenda to nationalize a gold mine without compensation.

Factual background and claims

On September 17, 2002 Crystallex and Corporación Venezolana de Guayana (CVG), a Venezuelan state corporation, entered into a Mining Operation Contract (MOC) to develop mining concessions in the Las Cristinas area. Large gold deposits are said to exist in the area, located within Venezuela’s Imataca National Forest Reserve.

Between 2003 and 2008 Crystallex sought the necessary permits. To address certain concerns raised by Venezuela, Crystallex had to submit a revised environmental impact study. Afterwards, in a letter of May 16, 2007, the Ministry of Environment requested Crystallex to post a bond to “guarantee the implementation of the measures proposed in the document presented for the Environmental Impact Evaluation of the project, which have been analyzed and approved by this Office.” The letter further stated that, after the bond-related formalities, “the [environmental permit] […] will be handed over” (para. 561).

Even though Crystallex posted the bond and paid the environmental taxes, the Ministry of Environment denied the environmental permit in a letter dated April 14, 2008, based on concerns over the project’s impact on the environment and indigenous peoples in the Imataca reserve. In several public statements from 2008 to 2010, then-President Hugo Chávez and high-level officials expressed Venezuela’s intention to nationalize gold deposits, including Las Cristinas.

Crystallex notified the Ministry of Mines of a treaty dispute as early as November 2008. However, only on February 16, 2011—after CVG formally rescinded the MOC on February 3, 2011—did Crystallex initiate arbitration against Venezuela for expropriation of its investments and failure to accord them fair and equitable treatment (FET) and full protection and security, in breach of the Canada–Venezuela bilateral investment treaty (BIT). Crystallex asked for compensation of US$3.16 billion plus interest.

Venezuela frustrated Crystallex’s legitimate expectations, among other FET breaches

The tribunal looked to case law—including Rumeli v. KazakhstanLemire v. Ukraine and Bayindir v. Pakistan—to determine the content of the treaty’s FET standard, and concluded that it comprises a set of common elements that are relevant to the case at issue: “protection of legitimate expectations, protection against arbitrary and discriminatory treatment, transparency and consistency” (para. 543). It added that the conduct does not need to be outrageous or in bad faith to breach the standard.

According to the tribunal, most of Crystallex’s alleged expectations presented a “circularity of argument” (para. 551) or were “too general and indeterminate” (para. 553) to constitute a frustration of legitimate expectations, and therefore a breach of FET. However, looking more closely at the May 16, 2007 letter, the tribunal considered that it clearly indicated that Venezuela had completed the process of analysis and would deliver the permit once the bond had been posted, thus creating legitimate expectations on which Crystallex relied, by posting the bond and paying the environmental taxes.

Importantly, the tribunal disagreed with Crystallex’s suggestion that it had a right to the environmental permit. “From the point of view of international law,” the tribunal affirmed, “a state could not be said to be under an obligation to grant a permit to affect natural resources, and would always maintain the freedom to deny a permit if it so considers” (para. 581).

While the tribunal considered that, up to the letter of May 16, 2007, “the investor was overall treated in a straightforward manner” (para. 588), it concluded that the permit denial letter of April 14, 2008 contained elements of arbitrariness and evidenced lack of transparency and consistency. For example, the tribunal stated that the letter’s reference to global warming was “particularly troublesome,” noting that “to raise this concern for the first time in an attempt to justify the denial of the Permit is a clear example of arbitrary and unfair conduct” (para. 592).

The tribunal also took issue with the lack of reference to scientific data or studies to justify the denial, and stated that it was “unable to see how thousands and thousands of pages submitted by Crystallex, ensuing from years of work and millions of dollars of costs, could be so blatantly ignored” (para. 597). These “huge efforts,” according to the tribunal, “entitled Crystallex to have its studies properly assessed and thoroughly evaluated” (para. 597).

The tribunal held the letter denying the permit was fundamentally deficient and frustrated Crystallex’s legitimate expectations created by the May 16, 2007 letter. Furthermore, it considered that Venezuela subjected Crystallex to a “‘roller-coaster’ of contradictory and inconsistent statements” (para. 606) in the lead-up to the MOC’s rescission, thus breaching the FET standard under the BIT.

“Full protection and security” claim dismissed as it concerns physical, not legal security

Crystallex claimed that “full protection and security” encompasses legal security and stability, while Venezuela argued that the standard is limited to physical security. The tribunal agreed with Venezuela’s interpretation and based its decision on a line of cases including Saluka v. Czech Republic and Rumeli v. Kazakhstan. Given that Crystallex had neither claimed nor shown that Venezuela violated its physical security, the tribunal dismissed the claim.

Tribunal finds indirect expropriation in three groups of actions by Venezuela

In view of the BIT’s broad definition of investment, which covers contractual rights “to search for, cultivate, extract or exploit natural resources” (para. 661), the tribunal found that Crystallex’s rights under the MOC were capable of being expropriated.

Three groups of actions, cumulatively taken, led to the tribunal’s finding of indirect expropriation: first, the denial of the permit and its surrounding events; second, the public statements by high-level political authorities following the permit denial, which evidenced Venezuela’s intention to nationalize Las Cristinas and gradually caused the value of Crystallex’s investment to decrease; and third, the rescission of the MOC.

The tribunal also assessed whether the expropriation was lawful. It accepted Venezuela’s argument that the expropriation was carried out in pursuit of a public interest goal, and found that Crystallex did not establish that the expropriation occurred in violation of due process or in a discriminatory manner. However, given that Venezuela neither offered not provided prompt, adequate and effective compensation, the tribunal held that Venezuela expropriated Crystallex’s investment in breach of the BIT.

Tribunal uses average of two methodologies to calculate compensation

Considering the finding that Venezuela cumulatively breached the FET standard and the expropriation provision of the BIT, the tribunal decided to apply the “full reparation” standard under customary international law, using a “fair market value” methodology. It sided with Venezuela in choosing April 13, 2008—the day before the denial of the permit, which the tribunal saw as the first act in the creeping expropriation—as the appropriate valuation date.

In assessing the fair market value of the investment, the tribunal first asked whether it was appropriate to use the forward-looking approaches proposed by Crystallex (all of them aimed at calculating lost profits) or the backward-looking approach suggested by Venezuela (the cost approach, aimed at considering Crystallex’s expenditures in the investment). Crystallex’s summary of costs indicated expenditures in the amount of US$644.8 million.

The tribunal considered that, in the case at hand, it was appropriate to choose a methodology to calculate lost profits. It looked to the Standards and Guidelines for Valuation of Mineral Properties of the Canadian Institute of Mining, Metallurgy and Petroleum (CIMVal Guidelines) for confirmation of its methodological choice.

It then turned to the four forward-looking methodologies proposed by Crystallex. Dismissing the P/NAV method for not providing reliable figures and the indirect sales comparison method for yielding excessively speculative results, the tribunal awarded compensation of US$1.202 billion, based on the average of the figures resulting the stock market and market multiples methods. It also awarded pre- and post-award interest at the rate of the 6-month average U.S. dollar LIBOR plus one per cent, compounded annually.

Crystallex had also asked the tribunal to declare that the award was net of both Venezuelan and Canadian taxes, but the tribunal dismissed both requests.

Considering that “each side presented valid arguments in support of its respective case and acted fairly and professionally” (para. 959), the tribunal ordered each party to bear its own legal expenses and to share equally in ICSID costs.

Notes: The ICSID tribunal was composed of Laurent Lévy (President appointed by the parties, Brazilian and Swiss national), John Y. Gotanda (claimant’s appointee, U.S. national) and Laurence Boisson de Chazournes (respondent’s appointee, French national). The award is available in English at http://www.italaw.com/sites/default/files/case-documents/italaw7194.pdf and in Spanish at http://www.italaw.com/sites/default/files/case-documents/italaw7195.pdf.

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

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