Browse News by Theme
ICSID (World Bank)
UNCITRAL and Ad-Hoc SCC Rules (Stockholm) ICC Rules NAFTA CAFTA Energy Charter Treaty Argentine Disputes Payment of Awards Annulment and Court Review Damages Determinations Amicus Curiae Interventions EU External Investment Policy Intra-EU Treaties and Claims Treaty Negotiations Arbitrator Challenges Energy Disputes Mining Disputes Telecoms Disputes Transportation Disputes Environmental Disputes Human Rights Land Reform Disputes Stabilization Clauses RSS & Twitter
 Related Sites |
Tribunal to hear Venezuela nationalization claim under BIT, but tax and royalty disputes excluded due to timing of Exxon restructuring
publication date: Jun 16, 2010
By Luke Eric Peterson
Arbitrators at the International Centre for Settlement of Investment Disputes (ICSID) will hear a claim for compensation arising out of the nationalization of two investments owned by Exxon-Mobil in Venezuela. However, in their June 10, 2010 Decision on Jurisdiction, the tribunal also held that certain disputes over hefty tax and royalty increases arose prior to Exxon’s move to restructure its investments via a Dutch holding company. As such, the latter disputes may not be arbitrated pursuant to the Venezuela-Netherlands bilateral investment treaty (BIT). (Arbitrators also declined jurisdiction over claims brought pursuant to a Venezuelan investment statute; see our separate analysis). It remains to be seen how these recent developments will impact the sums claimed in the arbitration, which had been provisionally quantified at one juncture at 6 Billion USD. Tribunal scrutinizes restructuring of investments to bring them under treaty roof Exxon invested in a pair of Venezuelan oil-fields in the mid 1990s*, however when frictions later arose with the Venezuelan authorities over unilateral hikes in taxes and royalties, the US-based energy giant set in motion a process of restructuring its Venezuelan investments so that they would enjoy the protection of an international investment treaty. (Exxon’s home-country, the United States had discussed a BIT with Venezuela in the 1990s, but none was ever consummated.) Following the eventual nationalization of Exxon’s two investments in 2007, and a subsequent failure of the parties to work out adequate compensation, a group of Exxon companies turned to arbitration under a Venezuelan investment statute (see separate article above) and the Netherlands-Venezuela BIT.** Jurisdictional objections as to genuine control and indirect holdings are rejected Venezuela raised several objections to jurisdiction, including that the treaty does not explicitly protect “indirectly” held investments, thus precluding claims by companies further up the corporate ownership chain. However, on this point, the tribunal read the BIT’s “broad” investment definition to not require that “there be no interposed companies between the ultimate owner of the company or of the joint venture and the investment.” A literal reading of the BIT did not lead to the conclusion that “indirectly” held investments lacked protection. The tribunal also dismissed Venezuela’s contention that actual or genuine control was not exerted by Exxon’s Dutch holding company, thus rendering the BIT inapplicable. On this point, the tribunal noted that the BIT set a relatively low test for control – sufficient share-capital to permit control to be exercised – rather than actual or genuine control being proven to have been exercised. Use of “Corporation of Convenience” decried by Venezuela Of greater note, Venezuela had protested that ICSID arbitrators should reject Exxon’s treaty claim on the grounds that the firm had engaged in abusive treaty-shopping by using a so-called “corporation of convenience” in a bid to make the disputes eligible for ICSID arbitration. While the tribunal devotes some energy in its June 10, 2010 Decision to canvassing the applicable law and relevant case-law on so-called “abuses of right” by claimants, the recent Decision on Jurisdiction shies away from declaring Exxon’s corporate re-structuring maneuvers to be such an “an abuse of right”. Rather, the tribunal stresses, at the culmination of its jurisdictional analysis, that it would be abusive to restructure investments so that pre-existing disputes might be brought under a BIT. While going on to say that it could not assert jurisdiction over Exxon’s tax and royalty claims for this reason, the tribunal leaves ambiguous whether Exxon was engaging in an abusive tactic. In this regard, the tribunal notes that the claimants seemed to be conscious that restructuring simply to bring pre-existing disputes to ICSID could be abusive. The tribunal draws this inference as to Exxon’s views from the fact that the claimants maintained that they “invoke ICSID jurisdiction on the basis of the consent expressed in the Treaty only for disputes arising under the Treaty for action that the Respondent took or continued to take after the restructuring was completed.”*** "Abuse of right" arguments dissected in detail In weighing the abuse of right arguments, the tribunal first noted that all systems of law, whether domestic or international, have concepts framed in order to avoid misuse of the law. In particular, concepts of good faith, misuse of power, and abuse of right have all been recognized by international courts and tribunals. In the tribunal’s view, under general international law and as well the ICSID’s case-law, tribunals should evaluate an alleged abuse of right in light of “all circumstances of the case.” In this vein, the tribunal canvassed several earlier ICSID cases, including one much-discussed 2009 ruling in the Phoenix Action v. Czech Republic case, where ICSID arbitrators declined jurisdiction over a claim where the investor restructured investments in the Czech Republic – while disputes were already afoot with Czech authorities – in a bid to gain protection of an Israeli investment treaty with the Czech Republic. Arbitrators in the Mobil case noted that the tribunal in the Phoenix Action case had weighed a series of factors, including “the timing of the investment, the initial request to ICSID, the timing of the claim, the substance of the transaction, and the true nature of the operation.” While tribunals in other cases used other criteria to take their measure of an alleged abuse of right, the Mobil tribunal saw an overarching desire to preserve the integrity of the ICSID system and to give effect to the object and purpose of the ICSID Convention. Applying its analysis to the facts of the case, the tribunal acknowledged that Exxon had engaged in restructuring largely to protect its investments from adverse Venezuelan measures. First, the tribunal noted that the claimant did not hide the restructuring. Further, the tribunal held that no adverse inferences should be drawn from the fact that no great sums were sunk into Venezuela after the restructuring took place. Simply put, the heavy investments had been made earlier, the project was “up and running”, and Exxon was under no obligation to inject new money into the project after the treaty-inspired re-structuring so as to own a protected investment. However, with respect to the timing of disputes that might be arbitrated under the treaty, the tribunal took note of various threat-letters and Notices of Disputes which had been written by Exxon prior to the restructuring. In these notices, the company put Venezuela on notice of disputes arising out of the tax and royalty changes. The tribunal took these notices as evidence that there were pending disputes at the time of restructuring, and, as such, these were ineligible for arbitration under the Dutch treaty. Notably, the tribunal took a different view with respect to the expropriation, which took place in 2007 after the restructuring. Here, the tribunal thought it perfectly appropriate that an investor might structure its investments so as to protect in case of “future” disputes. To date, the parties to the dispute have not offered any detailed analysis or commentary in relation to the tribunal’s reasoning or its implications. It remains to be seen to what extent Exxon’s nixed tax and royalty claims may be shoe-horned into a parallel ICC contract arbitration.**** In the recent Decision on Jurisdiction, it was noted that certain “discriminatory” measures could give rise to compensation – although these are subject to an unspecified “ceiling on compensation”.
|
What We Do
Testimonials
|
