{"id":5091,"date":"2018-04-24T08:36:06","date_gmt":"2018-04-24T13:36:06","guid":{"rendered":"https:\/\/www.iisd.org\/itn\/?p=5091"},"modified":"2024-08-09T18:28:31","modified_gmt":"2024-08-09T16:28:31","slug":"icsid-tribunal-dismisses-expropriation-case-against-venezuela-jurisdictional-grounds-bettina-muller","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2018\/04\/24\/icsid-tribunal-dismisses-expropriation-case-against-venezuela-jurisdictional-grounds-bettina-muller\/","title":{"rendered":"ICSID tribunal dismisses expropriation case against Venezuela on jurisdictional grounds"},"content":{"rendered":"

F\u00e1brica de Vidrios Los Andes, C.A. and Owens-Illinois de Venezuela, C.A. v. Bolivarian Republic of Venezuela, ICSID<\/span> Case No. ARB\/12\/21<\/h2>\n

On November 13, 2017, a tribunal at the International Centre for Settlement of Investment Disputes (ICSID) declined to exercise jurisdiction over a USD 1.4 billion case initiated in 2012 by two U.S.-owned Venezuelan glass companies, F\u00e1brica de Vidrios Los Andes, C.A. (Favianca) and Owens-Illinois de Venezuela, C.A. (OIdV), expropriated in 2010 by former Venezuelan president Hugo Ch\u00e1vez Fr\u00edas.<\/p>\n

Background and claims<\/h3>\n

Alleging environmental damage and years of exploitation of Venezuelan workers, on October 26, 2010, former Venezuelan President Hugo Chavez Fr\u00edas expropriated the two largest businesses for production and distribution of glass containers in Venezuela, Favianca and OIdV, both owned by U.S.-based multinational Owens-Illinois. According to the presidential decree, expropriation was necessary to \u201cstrengthen the industrial capacity of the public sector in the manufacture of glass containers for the Venezuelan people\u201d (para. 139). In 2011, Favianca and OIdV were merged into the state-owned company Venezolana del Vidrio, C.A. (Venvidrio).<\/p>\n

In 2012, after the unsuccessful attempt to agree on the amount Venezuela should pay in compensation for the two plants, two parallel cases were brought against the state. One was initiated in March by OI European Group B.V. (OIEG) (ICSID Case No. ARB\/11\/25) and a second one in July by Favianca and OIdV (ICSID Case No. ARB\/12\/21). In both cases, the claimants alleged unlawful expropriation and other investment treaty breaches. Given that the majority shareholder of both plants was the Dutch company OIEG, the claimants invoked the Venezuela\u2013Netherlands bilateral investment treaty (BIT<\/span>).<\/p>\n

The first case was resolved in 2015 when the tribunal unanimously decided in favour of the investor and ordered Venezuela to pay USD 372.4 million plus interest, out of the USD 929.5 million OIEG had originally claimed. A summary of the award<\/a> was published in ITN<\/span> May 2015. The annulment proceeding Venezuela subsequently launched is still pending. In the second case, summarized here, the ICSID tribunal dismissed the claims of Favianca and OIdV on jurisdictional grounds.<\/p>\n

Before proceeding to the details of the tribunal\u2019s decision, it is important to note that Venezuela formally denounced the ICSID Convention<\/span> on January 24, 2012. According to ICSID Convention Article 71, denunciation takes effect six months after its official submission. Favianca and OIdV filed their claim on July 20, 2012, and argued that it still fell within ICSID jurisdiction, an interpretation Venezuela disputed. Venezuela had also unilaterally ended the BIT with the Netherlands in 2008, but the treaty\u2019s sunset clause provides for 15 more years of applicability to investments made prior to the date of denunciation.<\/p>\n

ICSID jurisdiction depends on perfected consent<\/h3>\n

In view of Venezuela\u2019s decision to leave ICSID, the key debate in this case was whether or not the centre still had jurisdiction over the case. The tribunal deemed it relevant to interpret Article 9 of the BIT in question, which selects ICSID as the forum to settle investor\u2013state disputes under the treaty, as well as ICSID Convention Article 71 and Article 72. Article 71 provides for the denunciation of the Convention, and Article 72 states that the denunciation \u201cshall not affect the rights or obligations under this Convention of that State\u2026arising out of consent to the jurisdiction of the Centre given by one of them before such notice was received by the depositary.\u201d<\/p>\n

With respect to BIT Article 9, Favianca and OIdV reasoned that Venezuela\u2019s denunciation of the Convention was irrelevant, since the country gave \u201cunconditional\u201d consent to the jurisdiction of ICSID in Article 9(1) and (4), which, due to the BIT\u2019s sunset clause, would be applicable until 2023 to all investments made prior to the BIT\u2019s termination date.<\/p>\n

The arbitrators rejected this argument, holding that ICSID arbitration was only available if the conditions for access to ICSID arbitration in both the investment treaty and the ICSID Convention had been satisfied (para. 261). The tribunal concluded that \u201conly where consent to arbitration to the jurisdiction of the Centre is perfected, such that it generates rights and obligations under the ICSID Convention, that those rights and obligations persist following the receipt of a notice of denunciation by a Contracting State pursuant to Article 71\u201d (para. 282). It clarified that the denunciation of the ICSID Convention did not affect proceedings already in course or existing ICSID arbitration agreements.<\/p>\n

On the other hand, the tribunal considered that, in analyzing Article 71 and 72 of the ICSID Convention, it had to reconcile two different objectives: \u201cThe first is to facilitate a Contracting State\u2019s orderly exit from the ICSID Convention in case of a denunciation. The second is to protect the legitimate expectations of those who have relied upon that Contracting State\u2019s consent to ICSID arbitration\u201d (para. 289). In this case, it sided with Venezuela. Explaining its decision, the tribunal argued that ICSID Convention Article 72 could not be extended to agreements to arbitrate in addition to existing agreements. Otherwise, the denouncing state could potentially be the respondent in an unlimited and unforeseeable number of future ICSID arbitrations until its unilateral consent remained binding in investment treaties. This would also leave Article 71 without effect.<\/p>\n

Thus, the tribunal concluded that it would only have had jurisdiction over the dispute if Venezuela had entered into an agreement with the investors to submit disputes to ICSID arbitration before the notice of denunciation. Since this was not the case, and Venezuela had withdrawn from the ICSID Convention before Favianca and OIdV submitted the case, perfected consent was not given and the tribunal consequently had no jurisdiction over the dispute.<\/p>\n

Costs<\/h3>\n

The tribunal ordered each party to bear its own legal fees and expenses and determined that Favianca and OIdV pay all arbitration costs, which amounted to more than USD 915,000.<\/p>\n

Annulment pending<\/h3>\n

On March 9, 2018, Favianca and OIdV initiated an annulment proceeding, challenging the tribunal\u2019s decision on the grounds that it \u201cexceeded its power…and misinterpreted and misapplied the BIT and the ICSID Convention\u201d (para. 37 of the application for annulment). Also, according to the claimants, the Favianca<\/em> award \u201cwill provide an incentive for rogue states to violate their obligations under treaties, safe in the knowledge that they can prevent investors from holding them accountable\u2026simply by submitting a notice of denunciation of the ICSID Convention\u201d (para. 88).<\/p>\n

Notes<\/em>: The tribunal consisted of Hi-Taek Shin (presiding arbitrator, appointed by the ICSID Administrative Council after considering the parties’ observations), L. Yves Fortier (claimants\u2019 appointee, Canadian national) and Zachary Douglas (respondent\u2019s appointee, Australian national). The award is available at https:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw9383.pdf<\/a>. The application for annulment is available at https:\/\/pacer-documents.s3.amazonaws.com\/36\/180659\/04516475124.pdf<\/a>.<\/p>\n

Bettina M\u00fcller<\/strong> is a member of the Trade and Investment team of the Transnational Institute.<\/p>\n