Venezuela was ordered to pay US$372,461,982 plus interest to a company within the Owens-Illinois Group, one of the world’s largest producers of glass containers, for the expropriation of its investments in Venezuela. A tribunal at the International Centre for Settlement of Investment Disputes (ICSID) rendered the award on March 10, 2015.
Background and claims
The claimant, OI European Group B.V. (O-I), is a company constituted under Dutch law. Through two companies it controlled—Owens-Illinois de Venezuela C.A. (OIdV) and Fábrica de Vidrios los Andes C.A. (Favianca)—O-I owned the largest industrial plants for the production, processing and distribution of glass containers in Venezuela.
Venezuela’s intention to expropriate OIdV and Favianca became known on October 25, 2010, when then-President Hugo Chávez—during a television broadcast—ordered the Vice-President to take over the companies. The Expropriation Decree was issued the following day, directing the Office of the Attorney General to initiate the appropriate proceeding under Venezuela’s 2002 Expropriation Law. Armed National Guard officers were sent to the plants to control access and protect the assets.
At the employees’ urging, Venezuela took over the management of the plants a few days after the Expropriation Decree, and production was never halted. The newly created state-owned company Venvidrio has been managing the companies since April 30, 2011. At the time the arbitral award was rendered, the expropriation proceeding was still ongoing, and no compensation had been paid.
O-I initiated arbitration against Venezuela under the Venezuela–Netherlands bilateral investment treaty (BIT) in September 2011, alleging Venezuela breached the BIT clauses and standards on expropriation, fair and equitable treatment (FET), full physical protection and security, freedom of transfers, and the umbrella clause (through a breach of Venezuela’s Investment Law). O-I also asked for indirect and moral damages, claiming a total amount of damages of no less than US$929.544.714, plus interest.
Tribunal rejects Venezuela’s two jurisdictional objections
Venezuela objected that O-I did not have a covered investment, but the tribunal reasoned that O-I’s business assets, by their very nature, fulfill the definition of “investment” under the BIT and the ICSID Convention and the objective of the treaties to promote economic development. Referencing KT Asia v. Kazakhstan, Venezuela countered that, by acquiring the companies through corporate reorganization, without an effective contribution, O-I did not make an “investment.” The tribunal rejected the argument as well, pointing out that O-I and the Owens-Illinois Group had legitimately acquired the companies, made significant capital contributions and reinvested dividends.
O-I had also asked for damages of US$50 million for losses it would experience because of Venvidrio in the Brazilian market. In its second objection, Venezuela affirmed that the damages to O-I’s businesses outside Venezuela were beyond the scope of the tribunal’s jurisdiction. The tribunal, reasoning that issues of damages were intrinsically connected to the determination of a breach, decided to deal with Venezuela’s objection in the merits phase.
Tribunal holds that expropriation was unlawful
O-I’s main claim was that Venezuela unlawfully expropriated its investment. The tribunal found that the expropriation was carried out in the public interest (to favour domestic development) and was not discriminatory, but a strategic decision, considering that O-I’s companies held 60 per cent of the glass container market. However, it also found that the expropriation was not conducted under due process, as the assets to be expropriated were not precisely identified, and that Venezuela had unjustifiably delayed payment of compensation.
Unlawful expropriation also an FET breach, tribunal holds
After an analysis of the FET clause under the BIT, the tribunal held that the standard obligates Venezuela to treat foreign investors in accordance with international law and, in particular, without arbitrariness or discrimination. For the tribunal, given that the expropriation was unlawful as Venezuela failed to comply with due process and to compensate O-I, Venezuela also breached FET, “as it is difficult to imagine an illicit direct expropriation that does not result in a breach of this standard” (para. 501). Venezuela was also held to have acted arbitrarily by taking control of O-I’s production plants through ill-founded administrative acts, the actual purpose of which was to avoid seeking a court order as required by the Expropriation Law.
Full protection and security, freedom of transfers, and umbrella clause claims
The tribunal agreed with Venezuela’s defense that, by sending the National Guard to the plants for the first weeks after the expropriation, the country was ensuring compliance with the full protection and security standard rather than breaching it. It also sided with Venezuela in holding that O-I waived its right to free transfers under the treaty when it opted to transfer funds via the parallel exchange market. Yet it upheld the investor’s umbrella clause claim, considering Venezuela’s breaches of the country’s Investment Law to be treaty breaches.
No sufficient basis for moral damages claim
O-I claimed for US$10 million in moral damages it allegedly suffered during the six months following the expropriation. Arguing that Venezuela’s conduct was “atrocious” (para. 904) during that period, O-I referred to some of the facts already claimed as breaches of the FET and full protection and security standards. However, the tribunal held that O-I did not appropriately describe the facts and their effects. It concluded that the claimant could not demonstrate that Venezuela’s officials harassed or threatened the employees to continue working in the plants, or were physically aggressive or threatening when dealing with the companies, or caused any psychic suffering or reputation loss to O-I or its agents.
Damages, costs, legal expenses
The tribunal analyzed in great depth the calculation of damages owing to O-I for expropriation. Finally adopting the discounted cash flow (DCF) method, it concluded that the market value of the expropriated companies as calculated by the experts was both reasonable and confirmed by alternative methodologies. The value of the two companies was estimated at US$510,340,740. Taking into account O-I’s shareholding of 72.983 per cent of the companies, the tribunal awarded O-I damages amounting to US$372,461,982. It also set interest at the 1-year LIBOR rate plus 4 per cent, compounded annually, accruing from the date of Expropriation Decree until the date of payment.
In determining costs, the tribunal considered that O-I was successful in most of it claims. It ordered Venezuela to reimburse O-I for its contribution of US$500,000 to the costs of the proceeding, and to pay US$5,750,000 for reasonable defense costs, plus post-award interest.
Notes: The ICSID tribunal was composed of Juan Fernández-Armesto (President appointed by the Chairman of the Administrative Council, Spanish national), Alexis Mourre, (claimants’ appointee, French national) and Francisco Orrego Vicuña (respondent’s appointee, Chilean national). The award is available, in Spanish only, at http://www.italaw.com/sites/default/files/case-documents/italaw4209.pdf.
Martin Dietrich Brauch is an International Law Advisor and Associate of IISD’s Investment for Sustainable Development Program, based in Latin America.