{"id":7456,"date":"2015-05-21T23:28:50","date_gmt":"2015-05-22T04:28:50","guid":{"rendered":"https:\/\/iisd.org\/itn\/?p=7456"},"modified":"2024-08-09T18:26:07","modified_gmt":"2024-08-09T16:26:07","slug":"icsid-tribunal-finds-venezuelas-2009-seizure-to-be-lawful-expropriation-and-awards-us46-4-million-in-compensation","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2015\/05\/21\/icsid-tribunal-finds-venezuelas-2009-seizure-to-be-lawful-expropriation-and-awards-us46-4-million-in-compensation\/","title":{"rendered":"ICSID tribunal finds Venezuela\u2019s 2009 seizure to be lawful expropriation and awards US$46.4 million in compensation"},"content":{"rendered":"<h2><em>Tidewater Investment SRL &amp; Tidewater Caribe, C.A. <\/em><em>v. <\/em><em>The Bolivarian Republic of Venezuela<\/em><em>, <\/em><em><span class='tooltipsall tooltipsincontent classtoolTips18'>ICSID<\/span> Case No ARB\/10\/5<\/em><a href=\"#_ftn1\" name=\"_ftnref1\"><\/a><\/h2>\n<p>An oil and gas marine services dispute with Venezuela has resulted in an arbitration award at the International Centre for Settlement of Investment Disputes (ICSID).<\/p>\n<p>The tribunal agreed with the claimants, two companies within the Tidewater group, that the government\u2019s 2009 seizure constituted an expropriation under the Barbados\u00ad\u00ad\u2013Venezuela bilateral investment treaty (<span class='tooltipsall tooltipsincontent classtoolTips63'>BIT<\/span>). It awarded US$46.4 million in compensation plus interest compounded from the date of expropriation.<\/p>\n<p>The damages awarded fell significantly short of the claimants\u2019 ask of US$234 million. The tribunal did not accept that the expropriation was illegal under the BIT. In addition, the tribunal\u2019s discounted cash flow (DCF) analysis led to an assessment of fair market value that was significantly lower than the claimants\u2019 suggestion<\/p>\n<h4><strong>Background <\/strong><\/h4>\n<p>SEMARCA, a Venezuelan company within the Tidewater group, has been operating marine transportation services since 1958. From 1975 onwards, SEMARCA provided maritime support services to subsidiaries of Venezuela\u2019s national oil company, PDVSA, under various contracts.<\/p>\n<p>On May 7, 2009, Venezuela enacted the \u201cOrganic Law that Reserves to the State the Assets and Services Related to Primary Activities of Hydrocarbons\u201d (Reserve Law). The following day, May 8, 2009, Venezuela issued Resolution No. 51, identifying the claimants, along with 38 other service providers, as subject to the Reserve Law. PDVSA\u2019s subsidiaries seized SEMARCA\u2019s assets on Lake Maracaibo\u2014its offices and 11 vessels\u2014almost immediately and, later, its four vessels in the Gulf of Paria. Tidewater initiated arbitration in February 2010.<\/p>\n<p>In its February 2013 Decision on Jurisdiction, the tribunal dismissed the claims of six of eight claimants from the Tidewater group. The tribunal found jurisdiction over only Tidewater Caribe, C.A., a Venezuelan company that owned SEMARCA at all material times, and Tidewater Investment SRL, a Barbados company that owned Tidewater Caribe, C.A., since 2009 (jointly referred to as Tidewater).<strong>\u00a0<\/strong><\/p>\n<h4><strong>Seizure of Tidewater\u2019s assets had effect of expropriation <\/strong><\/h4>\n<p>The tribunal assessed whether the seizure of Tidewater\u2019s vessels constituted an expropriation. It remarked that BIT Article 5 on expropriation included a formulation that is commonly found in many investment treaties. The tribunal highlighted the question of \u201ceffect,\u201d stating that \u201cit is well accepted in international law that expropriation need not involve a taking of legal title to property. It is sufficient if the State\u2019s measures have an equivalent effect\u201d (para. 104).<\/p>\n<p>In assessing whether the measures in the current case had an effect equivalent to expropriation, the tribunal found it useful to consider the factors relied upon by the tribunal in <em>Pope &amp; Talbot<\/em>, namely, whether:<\/p>\n<ul>\n<li>the investment has been nationalized or the measure is confiscatory;<\/li>\n<li>the state has taken over control of the investment and directs its day-to-day operations;<\/li>\n<li>the state now supervises the work of employees of the investment; and,<\/li>\n<li>the state takes the proceeds of the company\u2019s sales.<\/li>\n<\/ul>\n<p>On the evidence, including the statements of witnesses from Tidewater and PDVSA\u2019s subsidiaries, the tribunal found that expropriation had occurred upon the physical seizure of the vessels.<\/p>\n<p>The tribunal found that, \u201c[w]hilst the seizure would have come as a surprise,\u201d it was natural for the claimants not to accept its effect immediately. According to the tribunal, \u201cthe scope of that effect upon Claimants\u2019 investment did not finally become clear until the seizure of the remainder of the vessels at Corocoro [in the Gulf of Paria] some two months later. In these circumstances, documents from Claimants asserting the continuation of their business in the intervening period are consistent with a dawning realisation that their business had been nationalised\u201d (para. 109).<\/p>\n<h4><strong>Tidewater fails to establish that expropriation was unlawful<\/strong><\/h4>\n<p>Tidewater had sought to convince the tribunal that the government\u2019s failure to pay compensation rendered the expropriation illegal under the BIT. Based on the parties\u2019 pleadings, the tribunal reviewed the international case law from <em>Chorzow Factory<\/em> onwards pertaining to a taking that lacks only the payment of fair compensation to be lawful. It further noted recent investment arbitrations following a consistent approach. The tribunal in <em>Goetz v. Burundi<\/em>, for example, held that \u201call other conditions for a lawful taking having been met, the failure to pay prompt and adequate compensation did not suffice \u2018to taint this measure as illegal under international law\u2019\u201d (para. 135).<\/p>\n<p>In the present case, Tidewater argued that the taking was illegal since Venezuela\u2019s contemplated level of compensation under the Reserve Law was inconsistent with the standard of compensation required by the BIT. The tribunal observed that, while the BIT defines the compensation payable for expropriation as market value immediately before an expropriation, the determination of that market value is delegated to the tribunal.<\/p>\n<h4><strong>Fair and Equitable Treatment claim is quickly dismissed<\/strong><\/h4>\n<p>The real focus of the claim was not on the procedural fairness of Venezuela\u2019s treatment of the claimants, but on its taking of their property. The tribunal saw as simply inapposite claims for breach of fair and equitable treatment as well as arguments based on national treatment and most-favored-nation treatment.<\/p>\n<h4><strong>Material factors of fair market value, such as country risk, determined by tribunal<\/strong><\/h4>\n<p>The tribunal found that determining fair market value by reference to either the liquidation value or the book value of the seized assets, as Venezuela proposed, would likely only be appropriate where the enterprise was not a proven going concern. Rather, given that SEMARCA was not a publicly listed company and that its business was limited to one country and one customer, a DCF analysis was appropriate.<\/p>\n<p>As the parties\u2019 expert reports tended to contain overly optimistic estimates, the tribunal made its own assessment as to each of six key factors in the DCF analysis, namely: scope of business, accounts receivable, historical cash flow, equity risk, country risk, and business risk. In terms of country risk, the claimants\u2019 expert had discounted a very modest 1.5 per cent to induce willing buyers prior to the 2009 taking. Venezuela\u2019s expert, on the other hand, had been in the potentially awkward position of discounting 14.75 per cent in respect of perceived political risks. The tribunal found the respondent\u2019s position reasonable adopting a 14.75 per cent premium. Ultimately, the expropriated assets\u2019 market value was determined to be significantly lower than claimed.<\/p>\n<p><em>Notes<\/em>: The tribunal was composed of Campbell McLachlan QC (President appointed by the Chairman of the ICSID Administrative Counsel, New Zealand national), Andr\u00e9s Rigo Sureda (claimant\u2019s appointee, Spanish national), and Brigitte Stern (respondent\u2019s appointee, French national). The final award of March 13, 2015 is available at\u00a0<a href=\"http:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw4206_0.pdf\">http:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw4206_0.pdf<\/a><\/p>\n<p>Matthew Levine is a Canadian lawyer and a contributor to <span class='tooltipsall tooltipsincontent classtoolTips32'>IISD<\/span>\u2019s Investment for Sustainable Development Program.<!--more--><\/p>\n<script type=\"text\/javascript\"> toolTips('.classtoolTips18','International Centre for Settlement of Investment Disputes'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips32','International Institute for Sustainable Development<!--more-->'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips33','Institut international du d\u00e9veloppement durable'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips34','Instituto Internacional para el Desarrollo Sostenible'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips60','Investment Treaty News'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips63','Bilateral investment treaty'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips65','East African community'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips67','Energy Charter Treaty'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips72','Investment Court System'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips100','investissement direct \u00e9tranger'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips104','responsabilit\u00e9 sociale des entreprises'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips106','asociaci\u00f3n p\u00fablica-privada'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips110','inversi\u00f3n extranjera directa'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips114','Sistema de Tribunales de Inversiones'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips116','European Commission'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips118','Union europ\u00e9enne'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips119','Uni\u00f3n Europea'); <\/script>","protected":false},"excerpt":{"rendered":"<p>Tidewater Investment SRL &#038; Tidewater Caribe, C.A. v. The Bolivarian Republic of Venezuela, <span class='tooltipsall tooltipsincontent classtoolTips18'>ICSID<\/span> Case No ARB\/10\/5<script type=\"text\/javascript\"> toolTips('.classtoolTips18','International Centre for Settlement of Investment Disputes'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips72','Investment Court System'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips100','investissement direct \u00e9tranger'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips118','Union europ\u00e9enne'); <\/script><script type=\"text\/javascript\"> toolTips('.classtoolTips119','Uni\u00f3n Europea'); <\/script><\/p>\n","protected":false},"author":1,"featured_media":15869,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[15],"tags":[],"class_list":["post-7456","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-awards"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.iisd.org\/itn\/wp-json\/wp\/v2\/posts\/7456","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.iisd.org\/itn\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.iisd.org\/itn\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.iisd.org\/itn\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.iisd.org\/itn\/wp-json\/wp\/v2\/comments?post=7456"}],"version-history":[{"count":0,"href":"https:\/\/www.iisd.org\/itn\/wp-json\/wp\/v2\/posts\/7456\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.iisd.org\/itn\/wp-json\/wp\/v2\/media\/15869"}],"wp:attachment":[{"href":"https:\/\/www.iisd.org\/itn\/wp-json\/wp\/v2\/media?parent=7456"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.iisd.org\/itn\/wp-json\/wp\/v2\/categories?post=7456"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.iisd.org\/itn\/wp-json\/wp\/v2\/tags?post=7456"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}