Venezuela to pay US$1 billion for expropriating Canadian mining company’s investment
Rusoro Mining Ltd. v. the Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/12/5
Claudia María Arietti López [*]
In an award dated August 22, 2016, a tribunal at the Additional Facility (AF) of the International Centre for Settlement of Investment Disputes (ICSID) ordered Venezuela to pay US$966.5 million plus interest to Canadian company Rusoro Mining Limited (Rusoro) for unlawfully expropriating its mining investment.
Background and claims
Between 2006 and 2008, through the acquisition of controlling interests in 24 Venezuelan companies, Rusoro indirectly acquired 58 mining concessions and contracts to explore and produce gold in Venezuela.
At that time, Venezuela had already established, among other restrictions, a limitation in the exportation of gold. In April 2009, it introduced further limitations, and in July 2010 it relaxed the rules for public companies while reaffirming the limitations for private companies. Finally, in July 2010, Venezuela reduced the restrictions and unified the regime for public and private producers.
On August 17, 2011, then-President Hugo Chávez announced the nationalization of the gold mining industry in Venezuela. On September 16, 2011, he issued a nationalization decree that provided for state control of the property and mining rights of all gold producing companies and ordered the transfer of all existing concessions or contracts to mixed companies controlled by the state.
After six-month negotiations, Rusoro and Venezuela could not reach an agreement on the compensation amount. Consequently, on July 17, 2012, Rusoro initiated arbitration proceedings, claiming that Venezuela expropriated its investment, among other breaches of the Venezuela–Canada bilateral investment treaty (BIT). Rusoro asked for a compensation of roughly US$2.3 billion plus interest.
Tribunal dismissed all of Venezuela’s jurisdictional objections
First, Venezuela argued that since Rusoro’s expropriation claims were also based on measures taken by Venezuela in 2009 and 2010, the dispute was time-barred by the three-year statute of limitation contained in the BIT. The tribunal determined that only measures taken by Venezuela before July 17, 2009 (three years before the filing of the request for arbitration) were time-barred.
In its second objection, Venezuela argued that there was no jurisdiction before the ICSID AF, since it had already withdrawn from the ICSID Convention when the arbitration was registered (in August 2012). The tribunal, agreeing with Rusoro, and in line with the decision in the Venoklim v. Venezuela case, held that the relevant date was the date of the request (July 17, 2012), when Venezuela was still an ICSID member state.
Venezuela also stated that Rusoro breached Article 29 of Venezuela’s mining law, which requires prior authorization from the Ministry of Mines before acquiring mining rights, and therefore, it was not a protected investor and did not have a protected investment under the BIT. The tribunal disagreed with Venezuela and concluded that Article 29 of the mining law does not apply to the indirect acquisition of companies that hold mining rights.
Rusoro’s direct expropriation claims upheld as Venezuela failed to ensure “prompt, adequate and effective compensation”
Rusoro argued that, through the 2011 nationalization decree, Venezuela expropriated its investment in violation of the BIT. In turn, Venezuela indicated that the BIT contemplated nationalization and that it complied with the BIT’s requirements, except for compensation. According to Venezuela, the failure to agree on the amount of compensation does not render nationalization unlawful per se.
Since both parties coincided that an expropriation took place, the tribunal then analyzed the lawfulness of the expropriation. It noted that while Venezuela’s expropriation was adopted for a public purpose, under due process of law and in a non-discriminatory manner, it failed to ensure prompt, adequate and effective compensation to Rusoro. Accordingly, it found that the expropriation was unlawful.
Regarding the public purpose requirement, the tribunal pointed that states have discretion in establishing their public policy and that the nationalization decree clearly stated the public purpose of the expropriation.
In addition, the tribunal held that the expropriation was carried out under due process of law because Rusoro had two options under Venezuelan law to challenge the nationalization decree, but never pursued them.
Concerning the non-discrimination prerequisite, the tribunal found that both Venezuelan and foreign investors were equally affected by the nationalization decree.
Regarding the compensation requirement, Rusoro alleged that it never received any compensation and that the negotiation was a “mere window dressing” (para. 398), since the nationalization decree limited compensation to book value. Venezuela, conversely, stated that it negotiated with Rusoro in good faith for six months and that Rusoro remained uncompensated because it rejected Venezuela’s offer.
The tribunal pointed out that the standard for compensation established in the BIT was the “genuine value” of the investment, which should be deemed to be the same as “fair market value.” It also indicated that the nationalization decree established a different standard, namely, the book value of the investment. The tribunal finally referred to the fact that Venezuela neither paid the amount offered nor deposited it in escrow in favor of Rusoro.
Alternative claim of creeping or indirect expropriation deemed unconvincing
Rusoro also claimed that it suffered indirect expropriation as result of a series of measures taken by Venezuela starting in 2009 that culminated with the nationalization decree. The tribunal dismissed this claim as it did not find convincing evidence that, before enacting the nationalization decree, Venezuela had envisioned and implemented a plan to nationalize the gold sector.
Success of ancillary claim that Venezuela’s increased restrictions on gold exports breached the BIT
Rusoro submitted several ancillary claims. The tribunal concluded that it failed to prove that Venezuela breached the BIT provisions regarding fair and equitable treatment, full protection and security, non-discrimination and free transfers. However, it found that Venezuela breached the BIT by imposing an increased restriction on the exportation of gold.
Rusoro claimed that, with the 2010 measures, Venezuela imposed various restrictions on Rusoro’s ability to export gold in breach of the BIT’s prohibition on export restrictions. The tribunal agreed. It noted that, while at the time Rusoro made its investment, the regulations in force allowed 85 per cent of the production to be exported, the 2010 regulation reduced that figure to 50 per cent.
Tribunal used average of three methodologies to calculate compensation
To find the “adequate compensation” amount to be paid by Venezuela to Rusoro for unlawful expropriation, the tribunal first noted that there were two issues on which the parties agreed: the proper valuation date was the date of the nationalization decree, and the “genuine value” of the investment was the “fair market value.”
In assessing the fair market value of the investment, the tribunal found that the best method to determine the quantum was to combine three methods of valuation: it gave 25 per cent weight to the maximum market valuation (US$700.6 million), 25 per cent to book valuation (US$908 million) and 50 per cent to the adjusted investment valuation (US$1.1 billion). Based on the above, the tribunal determined that the valuation of the investment on September 16, 2011 was $966.5 million.
The tribunal also ordered Venezuela to pay US$1.2 million as damage for breaching the BIT in connection with export limitations, and awarded pre- and post-award interest on the total amount of the award at the rate of USD LIBOR for one-year deposits, plus 4 per cent, compounded annually.
Notes: The ICSID AF tribunal was composed of Juan Fernandez-Arnesto (President, appointed by the parties, Spanish national), Francisco Orrego Vicuña (claimant’s appointee, Chilean national) and Bruno Simma (respondent’s appointee, German national). The award is available at: http://www.italaw.com/sites/default/files/case-documents/italaw7507.pdf.
ICSID tribunal dismisses MFN clause in WTO GATS as a means of importing Senegal’s consent to arbitration from third party BIT
Menzies Middle East and Africa S.A. and Aviation Handling Services International Ltd. v. Republic of Senegal, ICSID Case No. ARB/15/21
Suzy H. Nikièma [*]
In an award rendered on August 5, 2016, an International Centre for Settlement of Investment Disputes (ICSID) tribunal declined jurisdiction to hear an application for arbitration against Senegal. In particular, the tribunal accepted Senegal’s objection to jurisdiction, while rejecting the invocation of the most-favoured-nation (MFN) clause in the General Agreement on Trade in Services (GATS) of the World Trade Organization (WTO) to import consent by Senegal to international arbitration.
Background and claims
The claim was filed on April 17, 2015 by Menzies Middle East and Africa S.A. (Menzies), a company registered in Luxembourg, and Aviation Handling Services International Limited (AHSI), a company registered in the British Virgin Islands.
In November 2003 the claimants acquired AHS SA, a company under Senegalese law created for the conduct of ground handling activities at airports in Senegal.
According to the claimants, Mamadou Pouye and the brothers Ibrahim and Karim Aboukhalil, were the economic beneficiaries of the two companies that controlled AHS SA. Senegal argued instead that the economic beneficiary was in fact Karim Wade, son of the former President of Senegal and former Senegalese Minister of Air Transport.
AHS SA carried out its activities until 2013, when the Court for the Suppression of Illicit Enrichment (CREI, in its French acronym) opened an investigation against Wade, Pouye and the Aboukhalil brothers for illicit enrichment and collusion in illicit enrichment. As part of these proceedings, AHS SA was placed by CREI under temporary administration as a precautionary measure.
In March 2015 Wade was found guilty of illicit enrichment, and Pouye and the Aboukhalil brothers were found guilty of collusion in illicit enrichment. On order of CREI, their assets were confiscated, including their shares in AHS SA. The decision was confirmed by the Supreme Court of Senegal in August 2015.
In their claim to the ICSID tribunal, the claimants alleged that the placement of AHS SA under administration and the disastrous management that followed were not only illegal under Senegalese law, in particular the investment code, but also constituted indirect expropriation and a discriminatory measure under general international law and Senegal’s bilateral investment treaties (BITs) with the Netherlands and with the United Kingdom. They also alleged that the decision of the Supreme Court was arbitrary. Menzies and AHSI demanded total damages of €41,633,169.
Senegal, in rejecting the allegations, raised three objections to jurisdiction: absence of consent to arbitration (lack of jurisdiction ratione voluntatis); the non-existence of an investment made in Senegal (lack of jurisdiction ratione materiae); and the Senegalese nationality of the claimants (lack of jurisdiction ratione personae).
Analysis of jurisdiction ratione voluntatis by the tribunal
The question raised by the first objection was whether the state had given its consent to arbitration. To do this, the arbitrators considered the rules invoked:
(a) Article II(1) of the GATS, which provides that “each Member shall accord immediately and unconditionally to services and service suppliers of any other Member treatment no less favourable than that it accords to like services and service suppliers of any other country” (from the English version of the GATS).
(b) Article 12.2 of the investment code of Senegal, which provides that “disputes between a foreign natural or legal person and the Republic of Senegal […] shall be settled in accordance with the arbitration procedure […] arising […] from agreements and treaties on the protection of investments made between the Republic of Senegal and the State of which the investor is a national.”
(c) The dispute settlement provisions contained in the Senegal–Netherlands BIT (article 10) and the Senegal–United Kingdom BIT (article 8).
The tribunal firstly considered the case of Menzies (A), before addressing that of AHSI (B).
1. The case of Menzies
The claimants argued that the GATS MFN clause made it possible to import the consent to arbitration that Senegal had given in the two BITs. Senegal argued, among other things, on the contrary, that the claimants could not invoke the GATS because private individuals cannot invoke WTO agreements.
The tribunal refused to find for the claimants, believing that their argument was based on a “complex and very equivocal mechanism” (para. 131). It invoked three main elements in support of its decision.
The GATS does not provide consent to arbitration
According to the tribunal, “there is no consent to arbitration in any form whatsoever in article II of the GATS” (para. 139). Considering that this article refers neither to arbitration nor even to dispute settlement, the tribunal concluded that it could not extract from it the express, clear and unambiguous consent of Senegal to arbitration for nationals of Luxembourg such as Menzies, as required by general international law and investment arbitration.
2. The MFN clause in article II of the GATS is not applicable to investment arbitration
According to the claimants, as the GATS MFN clause is applicable “to measures […] that affect trade in services” (para. 115), this would include “offers of consent to arbitration” (para. 117). From this, offers of arbitration contained in the two BITs would be more favourable “treatment” within the meaning of the GATS, to the benefit of services similar to Menzies.
The tribunal was not convinced that article II of the GATS was applicable to investment arbitration. Based on discussions during the GATS negotiations, the tribunal concluded that member states had not given their “informed and unequivocal consent to application of the arbitration clauses contained in BITs” (para. 149). This conclusion was confirmed, said the tribunal, by the subsequent practice of states, which preferred to grant access to international arbitration to service providers in BITs and not through the GATS.
The tribunal also decided that even if it had been shown that article II of the GATS was applicable to investment arbitration, this did not constitute consent to arbitration or the extension of an offer of arbitration. The consequences of a contrary interpretation would be “considerable,” according to the tribunal (para. 145).
3. The claimants invoked BITs made by Senegal with third states for arbitration
According to the claimants, Menzies was entitled to invoke the MFN clause in the GATS to claim access to international arbitration, on the basis of two third-party BITs (Senegal–Netherlands and Senegal–United Kingdom). Indeed, Menzies asked the tribunal to consider the GATS as the “basic treaty” in implementation of the MFN clause, to import the more favourable treatment granted in these two BITs; this more favourable treatment here being the offer of arbitration.
The tribunal dismissed these arguments and refused to “‘compose’ consent by ‘the gluing together’ of disparate parts subsequent to […] an analysis of the ‘interplay’ between the MFN clause and the offers of arbitration addressed to investors from third States” (para. 135).
2. The case of AHSI
With regard to AHSI, the tribunal upheld the position of Senegal, according to which article 12 of the investment code did not constitute an independent offer of consent to arbitration or a unilateral grant of jurisdiction. It also noted, as affirmed by the respondent, that AHSI, registered in the British Virgin Islands, did not benefit from the protection of the Senegal–United Kingdom BIT. Therefore, AHSI could not invoke the offer of arbitration.
Having accepted Senegal’s first objection to jurisdiction, the tribunal decided that it was not necessary to examine the other objections, and it declined jurisdiction to hear the case.
Based on the “costs follow the event” principle, the tribunal decided that the claimants were to bear all the costs of the arbitration and also the costs for legal counsel incurred by Senegal.
Notes: The tribunal was composed of Bernard Hanotiau (President appointed by the parties, Belgian national), Hamid Gharavi (claimants’ appointee, Franco-Iranian national), and Pierre Mayer (respondent’s appointee, French national). The award is available in French only at http://www.italaw.com/sites/default/files/case-documents/italaw7483.pdf. Quotes in this summary were translated from French, unless otherwise indicated.
PCA tribunal deemed acts of Polish agricultural property agency not attributable to Poland
Mr. Kristian Almås and Mr. Geir Almås v. The Republic of Poland, PCA Case No. 2015-13
Claudia María Arietti López [*]
In a case administered by the Permanent Court of Arbitration (PCA), a tribunal decided that the acts of Poland’s agricultural property agency were not attributable to Poland, dismissing the case initiated by Norwegian claimants, Kristian Almås and Geir Almås, on its merits.
Factual background and claims
The claimants were the sole shareholders in Pol Farm Sp. z oo (Pol Farm). In 1997 Pol Farm and Poland’s agricultural property agency (ANR, in its Polish acronym) entered into a lease of approximately 4200 hectares of land in Świdwin Commune, Poland (Lease Agreement).
After conducting a series of inspections and finding several irregularities in Pol Farm, ANR terminated the Lease Agreement in July 2009. In October 2009, a District Court in Poland opened Pol Farm’s bankruptcy proceedings and liquidated the company. In addition, in October 2015, a criminal court in Poland found the claimants guilty of misappropriation and several other charges. The judgment is currently under appeal.
In November 2013, the claimants initiated arbitration against Poland, claiming that ANR’s actions breached the Norway–Poland bilateral investment treaty (BIT) by expropriating their investment without adequate compensation, failing to accord them equitable and reasonable treatment and protection, and subjecting them to unreasonable and discriminatory measures. They also argued that Poland’s termination of the Lease Agreement breached the BIT’s umbrella clause. They requested compensation in the amount of €23 million, in addition to interest and costs. The claimants did not include the criminal convictions against them and the bankruptcy order against Pol Farm in the claim.
Scope of claimants’ case determined by issue of attribution of ANR’s actions to Poland
The claimants’ main claim was that ANR’s termination of the Lease Agreement amounted to indirect expropriation. The tribunal thus focused first on whether ANR’s conduct could be attributed to Poland, pointing out that the lack of attribution would undermine all claims. As suggested by both parties, the tribunal turned to the International Law Commission’s 2001 Draft Articles on Responsibility of States in Internationally Wrongful Acts (the ILC Articles) to analyze the issue.
ILC Article 4: Is ANR a state organ?
ILC Article 4 expresses that the conduct of a state organ—including any person or entity with that status under the domestic law of the state—is considered an act of that state. The tribunal noted that, under Polish domestic law, ANR has separate legal personality and exercises operational autonomy. Accordingly, it concluded that ANR could not be considered a de jure state organ under the laws of Poland.
The tribunal also noted that the commentary to ILC Article 4 considers that an entity can also be a de facto state organ. In this regard, the claimants argued that ANR exercises executive functions of the state because it has the power to manage, sell and lease state agricultural property. The tribunal disagreed with the claimants’ view, considering that an agricultural lease is a commercial transaction, even if entered into with a state entity and even if it involves state-owned land.
Furthermore, to analyze ANR’s autonomy, the tribunal looked at two other cases, Hamester v. Ghana and Jan de Nul v. Egypt. Based on the shared features of the entities in these cases and ANR, the tribunal concluded that ANR could not be considered a de facto state organ since it enjoys managerial and financial autonomy.
ILC Article 5: Was the termination of the lease performed in the exercise of governmental functions?
Under ILC Article 5, the conduct of an entity that is not a state organ can still be attributed to a state when that entity can exercise governmental authority and actually exercises that authority when performing the relevant conduct.
When analyzing this article, the tribunal relied on Jan de Nul’s two-prong test, which states that acts must be carried out by an entity empowered to exercise governmental authority, and the act itself must involve the exercise of that government authority.
The tribunal noted that even though ANR entered into the Lease Agreement by exercising its statutory power to manage the state’s agricultural property, it was not exercising a governmental authority when it terminated it. Therefore, it concluded that such action could not be attributed to Poland.
To counteract the above, the claimants argued that the termination was not authorized by the Lease Agreement, and that it was the result of an underlying policy motivation, which converted the act into an exercise of state authority under ILC Article 5.
The tribunal disagreed with the claimants, stating that it did not need to reach a “definitive conclusion as to the lawfulness of ANR’s termination of the Lease Agreement under Polish law” (para. 251). It pointed out that it only needed to decide, as it already had, that the termination was an exercise of a contractual power.
Concerning whether the termination was motivated by an underlying policy, the tribunal analyzed the Vigotop v. Hungary award, on which the claimants relied. The Vigotop tribunal determined that Hungary expropriated Vigotop’s investment by exercising a termination provision in a contract signed by its subsidiary with Hungary.
The tribunal first noted that the Vigotop case concerned the termination of a contract with the state itself and not with a separate entity with contractual capacity. It then analyzed whether the conditions articulated by the Vigotop tribunal were satisfied, and concluded that they were not.
ILC Article 8: Was the termination of the lease performed on the instructions of the Polish government?
The tribunal also looked at ILC Article 8, under which the conduct of an entity can be considered an act of a state if the entity is, in fact, acting on the instructions or under the direction or control of that state in carrying out the conduct.
Relying on the commentary to ILC Article 8 and the awards in Jan de Nul v. Egypt and White Industries v. India, the tribunal indicated that to determine whether the act of an entity could be attributed to a state, the state should have control over both the entity and the specific act in question.
Finding no evidence that ANR acted on the instructions or under the direction or control of the Polish government, the tribunal concluded that there was no basis for attribution under ILC Article 8.
Notes: The tribunal was composed of James R. Crawford (Presiding arbitrator, appointed by his co-arbitrators, Australian national), Ola Mestad (claimant’s appointee, Norwegian national) and August Reinisch (respondent’s appointee, Austrian national). The award dated June 27, 2016 is available at http://www.pcacases.com/web/sendAttach/1872.
Claimant not considered investor due to interpretation of “seat” under Cyprus–Montenegro BIT
CEAC Holdings Limited v Montenegro, ICSID Case No. ARB(AF)/14/8
María Florencia Sarmiento [*]
A tribunal at the International Centre for Settlement of Investment Disputes (ICSID) declared by majority that the claimant did not have a “seat” in Cyprus under the Cyprus–Montenegro bilateral investment treaty (BIT) and therefore did not qualify as an “investor” under the BIT. Accordingly, the tribunal declined to exercise jurisdiction over the case.
Factual background and claims
The case concerns an aluminum plant (KAP) in Montenegro which was owned and managed by CEAC, a company established under the laws of Cyprus. In 2003 CEAC acquired approximately 65 per cent of KAP’s shares from the Government of Montenegro. To improve and make KAP profitable, CEAC also purchased a minority share of KAP’s main supplier of raw materials, RBN. In addition, CEAC’s parent company acquired in a tender process all of the shares in a Montenegro state-owned coal power plant to ensure KAP had a source of electricity.
In 2006 CEAC began experiencing problems when it learned that Montenegro had provided inaccurate financial statements for KAP and RBN during the tender process, which understated KAP’s debts and obligations by €10 million. This led to the end of the privatization of the coal power plant by the Montenegrin parliament “based on dubious reasoning,” compromising KAP’s supply of competitively-priced electricity.
CEAC initiated an arbitration against the sellers and Montenegro under the purchase and sale agreement in order to resolve these issues, but it was discontinued after entering into a settlement agreement in November 2007. Pursuant to the settlement, CEAC transferred 50 per cent of its shares in KAP to Montenegro, which in exchange undertook to subsidize KAP’s electricity supply and to issue state guarantees to KAP.
In 2014, CEAC initiated ICSID arbitration against Montenegro, asserting that the government impeded its attempts to restructure and modernize KAP by a number of actions that caused KAP to default on its debts. These actions included, according to CEAC, the refusal to provide KAP with the electricity subsidies granted under the settlement agreement, the refusal of Montenegro’s representative on the KAP board of directors to approve the financial statements and business plan and the refusal to provide its written consent as guarantor under a loan agreement.
CEAC claimed that Montenegro breached several obligations under the BIT, including the fair and equitable treatment (FET) standard, the national and most-favoured-nation treatment clauses and the prohibition against unlawful expropriation, requesting monetary compensation.
The issue of the “seat”
CEAC sought an award declaring that it had a seat in Cyprus and thus qualified as an “investor” pursuant to Article 1(3)(b) of the BIT. For its part, Montenegro requested a declaration that CEAC did not have a seat in Cyprus.
Article 1 of the BIT provides in relevant part: “3. The term ‘investor’ shall mean […] (b) a legal entity incorporated, constituted or otherwise duly organized in accordance with the laws and regulations of one Contracting Party, having its seat in the territory of that Contracting Party and making investments in the territory of the other Contracting Party.”
According to CEAC, the meaning of the term “seat” cannot be interpreted autonomously under the treaty but should be determined by a renvoi to municipal law. In this context, CEAC maintained that the term “seat” means “registered office,” not “real seat,” and that this is the interpretation supported by Regulation of the European Parliament and the treaty practice of both Cyprus and Montenegro. It contended that it established its registered office in Cyprus and that the respective certificates of registered office constitute conclusive evidence to this effect.
In Montenegro’s view, the “seat” is the place where a legal entity is effectively managed and financially controlled and where it carries out its business activities. It also asserted that the object and purpose of the BIT do not provide a renvoi to municipal law because the “seat test” must be conducted on a basis of reciprocal and identical criteria.
According to Montenegro, the term “seat” interpreted autonomously under the BIT required something “more than a registered office” and even under Cypriot law, the term “seat” cannot be considered as a “registered office” (para. XYZ).
Montenegro’s view was that, regardless of the interpretation of the term, CEAC did not have a seat in Cyprus, and the address provided for the alleged office did not qualify as a registered office within the context of Cypriot law. It disputed that the certificates produced were conclusive evidence, indicating that such certificates are issued without any independent investigation. It also asserted that an attempt to courier a package to that CEAC’s address in Cyprus failed three times because CEAC was not known at that address.
The tribunal’s analysis
The majority considered that for purposes of the analysis it was not necessary to determine the precise meaning of the term “seat” as employed in the BIT given that the evidence in the record did not support a finding that CEAC had a registered office in Cyprus at the relevant time.
The majority also considered that, even under Cypriot municipal law, certificates of registered office are not conclusive evidence that the office exists. It noted that CEAC neither provided evidence against Montenegro’s assertions that the office appeared unoccupied and inaccessible to the public nor indicated another address in Cyprus. Therefore, it concluded that CEAC did not have a registered office in Cyprus at the time the request of arbitration was filed.
CEAC had asserted an alternative claim, alleging tax residency in Cyprus, but the tribunal concluded that, under Cypriot law, “seat” cannot be equated with “tax residence.”
Decision and costs
The majority decided that CEAC did not have a “seat” in Cyprus and therefore did not qualify as an “investor” under the BIT. As a consequence, the majority found that it had no jurisdiction to hear the case and dismissed all other claims. It also ordered CEAC to bear the full cost and expenses of the proceedings except the ones incurred regarding Montenegro’s preliminary objections according to the principle that costs should follow the event and given the fact that Montenegro’s preliminary objections were dismissed.
Separate opinion by William Park
William Park, the arbitrator appointed by CEAC, issued a separate opinion dissenting on the central issue of the seat. Park disagreed with the majority’s finding that “seat” requires more than a “registered office”, asserting that the term remains essentially a municipal law concept derived from continental systems. According to the arbitrator, the plain meaning of “registered office” matches the meaning of “seat” in Cyprus as used in the BIT. Under this standard, the Park stressed that CEAC appeared to have a seat.
Notes: The ICSID tribunal was composed by Professor Bernard Hanotiau (President agreed to by the parties, Belgium national), Professor William P. Park (claimant’s appointee, Switzerland and United States national), and Brigitte Stern (respondent’s appointee, French national). The award of July 26, 2016 is available in English only at http://www.italaw.com/sites/default/files/case-documents/italaw7456.pdf.
Ecuador’s levy on extraordinary oil profits at a 99% rate has breached Murphy’s legitimate expectations, decides PCA tribunal
Murphy Exploration & Production Company – International v. Republic of Ecuador, PCA Case No. 2012-16 (formerly AA 434)
Inaê Siqueira de Oliveira [*]
In the proceeding brought by U.S.-based company Murphy Exploration & Production Company – International against Ecuador, a tribunal under the auspices of the Permanent Court of Arbitration (PCA) held that Ecuador breached the fair and equitable (FET) treatment under the Ecuador–United States bilateral investment treaty (BIT) by enacting Law 42 and Decree 662, which established a levy on oil profits resulting from sales above a certain reference price.
This was not the first time an arbitral tribunal ruled on a case brought by Murphy against Ecuador. In December 2010, after a proceeding that took nearly 3.5 years, the majority of a tribunal at the Centre for Settlement of Investment Disputes (ICSID) had declined jurisdiction to hear the case (ICSID Case No. ARB/08/4).
The Participation Contract
The starting point of the dispute is a Participation Contract signed in 1996 between Corporación Estatal Petrolera Ecuatoriana, the predecessor of the state-owned Petroecuador, and a consortium of foreign investors for oil exploration and production (Consortium). Murphy controlled one of the companies participating in the Consortium until March 2009.
Under the Participation Contract, Consortium members had ownership rights over their shares in oil production. The shares were calculated using a formula, which, according to Murphy, did not include oil price as a variable. According to Ecuador, however, “the price of oil was an integral part of the formula for calculating the parties’ shares in participation” (para. 74).
The global rise in oil prices, Law 42 and Decree 662
In early 2002, global prices of crude oil began to rise, reaching a peak of US$75 per barrel in July 2006, nearly four times the medium price of the two earlier decades (approx. US$20 per barrel).
In that scenario, Ecuador enacted Law 42, amending the country’s Hydrocarbons Law to allow “the State to receive from oil companies with participation contracts what was described as ‘participation in the surplus of oil sale prices’” (para. 82). Said differently, Law 42 provided that Ecuador would participate in the Consortium’s extraordinary income resulting from the sale of crude oil above the reference price—namely, the oil price that prevailed when the Participation Contract was concluded. Through Law 42 Ecuador set its participation at a minimum of 50 per cent of the extraordinary profits resulting from prices exceeding the reference price; in 2007, through Decree 662, Ecuador changed it to 99 per cent.
Murphy alleged that Law 42 had been a unilateral modification of the Participation Contract and that, because of the law’s detrimental effects on the investment, “it had no choice but to forego its investment by selling its interest in the Consortium” (para. 5). Ecuador, on the other hand, replied that Law 42 was a “matter of taxation” explicitly carved out from the BIT, implemented in view of an exceptional rise in oil prices, and that Law 42 aimed to maintain the agreements with petroleum sector operators while protecting public interest in natural resources.
The tribunal’s jurisdiction: the meaning of “taxation”
Ecuador submitted that Law 42 was a “matter of taxation,” which Article X of the BIT excludes from dispute resolution, unless related to certain specific claims (for instance, expropriation). The tribunal rejected Ecuador’s assertion. Following the approach taken in EnCana v. Ecuador, Occidental v. Ecuador and Duke Energy v. Ecuador for interpreting the meaning of “matter of taxation,” the tribunal considered it necessary to assess “whether that measure comes within the State’s domestic tax regime” (para. 166) and whether the measure could be characterized as tax at international law.
According to the tribunal, Law 42, unlike the challenged measure in EnCana, was “not enacted as a tax or otherwise part of the national tax regime” (para. 175), but enacted as an amendment to the Hydrocarbons Law under the President’s power to submit emergency draft legislation. Relying on Burlington v. Ecuador, the first tribunal to rule on whether Law 42 was a tax-related measure, and Occidental II v. Ecuador, which also analyzed the issue, the tribunal held that Law 42 did not constitute a matter of taxation within the meaning of the BIT. It considered the measure “a unilateral change by the State to the terms of the participation contracts that were governed by the Hydrocarbons Law” (para. 190).
The breach of FET
As for the merits of the dispute, the tribunal did analyze whether the FET provision of the BIT reflected an autonomous standard above the customary international law one. Instead, it considered “that there is no material difference” (para. 208) between them and proceeded to the analysis of whether Law 42 and Decree 662 breached Murphy’s legitimate expectations.
The tribunal accepted the notion, suggested by Murphy, that legitimate expectations “are grounded in the legal framework as it existed at the time that the investment was made” (para. 249). Thus, it considered that Murphy could legitimately expect that the terms of the Participation Contract would not change and that changes would only be made “within the confines of the law and pursuant to a negotiated mutual agreement between the contractual partners” (para. 273).
The tribunal disagreed with Murphy’s assertion that the Participation Contract contained a stabilization clause, which would prevent regulatory and legislative adjustments even in exceptional circumstances, such as a significant rise in oil prices. It found that Law 42, not having altered the Participation Contract in a fundamental way, had not breached Murphy’s legitimate expectations.
The tribunal did, however, found that Decree 662, which raised the state’s participation in the extraordinary income to 99 per cent, breached Murphy’s legitimate expectations. In the tribunal’s understanding, Decree 662 transformed the Participation Contract in a service contract, changing “the foundational premise upon which the Participation Contract had been agreed” (para. 282), namely, the Consortium’s ability to participate in the upside of high oil prices. It also referred to the “hostile and coercive investment environment” (para. 281) prevailing when Decree 662 was adopted as an element that reinforced the conclusion that Ecuador had breached its FET obligation.
The tribunal condemned Ecuador to pay nearly US$20 million in compensation to Murphy for damages incurred as a result of the payments, plus pre-award (approx. US$7.2 million) and post-award interest.
It also ordered Ecuador to pay the difference between the price at which Murphy was sold in 2009 (US$78.9 million) and the company’s fair market value as if Murphy had continued to make payments under Law 42 at 50 per cent, plus interest. If the parties do not agree on the latter value within three months, “the Tribunal will then make the necessary findings” (para. 504).
Notes: The arbitral tribunal was composed of Bernard Hanotiau (President appointed by the co-arbitrators), Kaj Hobér (Claimant’s appointee), and Yves Derains (Respondent’s appointee, appointed following the resignation of Georges Abi-Saab in December 2013). The award of May 6, 2016 is available at http://www.italaw.com/sites/default/files/case-documents/italaw7489_0.pdfhttp://www.italaw.com/sites/default/files/case-documents/italaw7336.pdf.
Ecuador ordered by PCA tribunal to pay $24 million to Canadian mining company
Copper Mesa Mining Corporation v. Republic of Ecuador, PCA No. 2012-2
Matthew Levine [*]
A tribunal under the auspices of the Permanent Court of Arbitration (PCA) constituted under the Canada–Ecuador Agreement for the Promotion and Reciprocal Protection of Investments (FIPA) has reached the award stage.
The tribunal ordered Ecuador to compensate a Canadian company for expropriation of two mineral concessions. The alleged expropriation of the company’s option interest in a third concession was dismissed. In light of contributory negligence by the company’s executives, the tribunal discounted damages by 30 per cent. The parties were ordered to bear their own legal costs and to share arbitration costs equally.
Background and claims
Between 1991 and 1997, the first sophisticated geological tests were conducted in the Junín area of Northwestern Ecuador. The final technical report confirmed large deposits of copper and noted potential environmental impacts of a proposed mine. Since then, an increasing number of local residents concerned about the deleterious impacts of mining organized to resist the activity.
Even so, in December 2002 Ecuador granted the Junín concession to an Ecuadorian national. In 2005, Canadian company Copper Mesa Mining Corporation Exploration (Copper Mesa), through Barbadian and Ecuadorian subsidiaries, acquired the Junín concession, the neighbouring Chaucha concession and an option for the Telimbela concession.
From 2005 onwards, Copper Mesa made a series of expenditures in relation to the concessions. In particular, it commissioned a geological report, acquired a neighboring concession and surface land in and around the concession areas, prepared and submitted an environmental impact study (EIS) for the exploration phase, employed a team of Ecuadorian staff and committed resources to providing social services and community development.
In April 2008 Ecuador’s Constituent Assembly passed legislation known as the Mining Mandate, which declared that mineral substances were “to be exploited to suit national interests” and provided for the termination “without economic compensation” of mining concessions falling into a number of categories (para. 1.110). Ultimately, Ecuador’s Under-Secretary of Mines ordered the termination of the Junín and Chaucha concessions due to a lack of prior consultation with the local residents.
In July 2010 Copper Mesa sent a written Notice of Dispute to Ecuador under the Canada–Ecuador FIPA, alleging that Ecuador unlawfully revoked or terminated the concessions, thereby depriving it the entire value of its investments and causing it to suffer substantial damages.
Investor is entitled to advance own claims in relation to inter-company loans to affected subsidiaries
Ecuador objected to the tribunal’s jurisdiction over all of Copper Mesa’s claims. In regard to the Junín concession, Ecuador also objected to the admissibility of the claims.
In an important objection to jurisdiction, Ecuador argued that Copper Mesa’s claim concerning damages to its local subsidiaries must be distinguished from a claim on its own behalf, and that the local subsidiaries must have separately consented to arbitration and waived any rights each may have under Ecuadorian law. However, the tribunal agreed with Copper Mesa that the company had complied with the formal requirements for initiating arbitration. It held that Copper Mesa was entitled, as a matter of jurisdiction and admissibility, to advance its own claims against the respondent, in respect of its own investments in Ecuador. According to the tribunal, the claimant was not seeking to advance or espouse any claim in the name of any its subsidiaries; it was only claiming compensation for harm that it itself had suffered.
The tribunal also addressed Ecuador’s contention that Copper Mesa had “unclean hands.” For the tribunal, Ecuador had adduced an impressive amount of expert testimony and materials relating to the legal doctrine of unclean hands under international law, including the obligations of foreign investors on human rights in the broadest sense. Even so, the tribunal indicated that this was a matter of admissibility rather than jurisdiction, and that Ecuador had not made a single complaint as regards international law, international public policy or human rights to the claimant prior to the commencement of arbitration. For the tribunal, it was then much too late.
Tribunal reconciles unlawful expropriation and FIPA’s General Exception provision
Copper Mesa’s substantive claims included Ecuador’s obligations to pay compensation upon direct or indirect expropriation, to provide fair and equitable treatment and full protection and security, and to provide national treatment.
With regards to expropriation, Ecuador contended that the Mining Mandate was a measure issued by the state in exercise of its legitimate regulatory authority and responding to a compelling public policy consideration, that is, the need to consult the affected local population, and seeking to address many unsolved social, economic and environmental issues. For Ecuador, the Mining Mandate therefore fell under the FIPA’s General Exceptions provision.
In the tribunal’s view, the applicable legal standards under international law were not in doubt. Rather, the primary issue was whether, in the circumstances, the government had acted in accordance with due process and not in an arbitrary manner. In particular, the tribunal sought to emphasize that its inquiry stemmed not from the Mining Mandate itself but from the Termination Resolutions ordered by the Under-Secretary of Mines based on the Mining Mandate.
Given the particular circumstances of the Termination Resolutions, the tribunal decided that they were “no mere regulatory measures, because, in the circumstances, these Resolutions were made in an arbitrary manner and without due process,” (para. 6.66) and held that “the permanent taking of the Claimant’s Junín concessions was an expropriation” under the FIPA (para. 6.67).
Damages reduced to reflect claimant’s contributory negligence
Copper Mesa had sought in its primary case on quantum to have the tribunal ratify a market-based quantification of damages with the mid-point of the relevant range falling at US$69.7 million. In the alternative, it presented a cost-based quantification amounting to US$26.5 million, as confirmed by its audited financial statements.
The tribunal began its analysis with the general principle under international law that it is for the claimant to prove the extent of its injury. It found that, ultimately, the market-based quantification relied on a methodology that was too uncertain, subjective and dependent upon contingencies. According to the tribunal, the “most reliable, objective and fair method in this case for valuing the Claimant’s investments in November 2008 and June 2009 is to take the Claimant’s proven expenditure incurred in relation to its Junín and Chaucha concessions” (para. 7.27).
With regards to the Junín concession, the tribunal decided that Copper Mesa contributed to 30 per cent of its loss by negligent acts and omissions committed by its own senior management in Canada. After deduction of such 30 per cent, the net loss on the Junín concession was set at US$11,184,595.80.
For the Chaucha concession, contributory negligence was not an issue, and Copper Mesa was awarded $8.3 million plus compound interest. For the claim related to Copper Mesa’ option on Telimbela having been dismissed, no damages were awarded.
Local residents sought to “countersue” Copper Mesa in Canadian courts
The Junín concession was located adjacent to a series of small villages. Between December 2005 and July 2007, tensions between village residents and Copper Mesa exploded into a series of physical confrontations.
In 2009 certain village residents filed a claim in Ontario courts against Copper Mesa and various other Canadian persons. In that lawsuit, the village residents claimed to have been subjected to a “campaign of intimidation, harassment, threats and violence” by security forces and other agents of Copper Mesa (OCA Judgment, para. 11). The court however found that, as the claims against Copper Mesa were based solely on vicarious liability, they disclosed no reasonable cause of action under the applicable Canadian law.
Subsequently, the Ontario Court of Appeal dismissed the village residents’ appeal. In doing so, it found: “The threats and assaults alleged by the plaintiffs are serious wrongs. Nothing in these reasons should be taken as undermining the plaintiffs’ rights to seek appropriate redress for those wrongs, assuming that they are proven. But that redress must be sought against proper parties, based on properly pleaded and sustainable causes of action. The claims at issue in these proceedings do not fall in that category” (OCA Judgment, para. 99).
Notes: The tribunal was composed of V.V. Veeder (President appointed by party agreement, British national), Bernardo Cremades (claimant’s appointee, Spanish national), and Bruno Simma (respondent’s appointee, German national). The final PCA award of March 15, 2016 is available at http://www.italaw.com/sites/default/files/case-documents/italaw7443.pdf. The Ontario Court of Appeal’s judgment in Piedra v. Copper Mesa Mining Corporation, 2011 ONCA 191, is available at http://www.ontariocourts.ca/decisions/2011/2011ONCA0191.pdf.
Claudia María Arietti López is a New York University School of Law International Finance and Development Fellow with IISD’s Investment for Sustainable Development Program.
Suzy H. Nikièma is an International Law Advisor of IISD’s Investment for Sustainable Development Program, based in Burkina Faso.
Maria Florencia Sarmiento is a teaching and research assistant at the Catholic University of Argentina.
Inaê Siqueira de Oliveira is a Law student at the Federal University of Rio Grande do Sul, Brazil.
Matthew Levine is a Canadian lawyer and a contributor to IISD’s Investment for Sustainable Development Program.