Majority of Tomka and Fortier allow investor to use an MFN clause to pursue UNCITRAL arbitration against Venezuela

In an interim award on jurisdiction rendered on July 26, 2016 and made public on Friday of last week [click to download], a divided UNCITRAL tribunal has rejected an objection raised in defence of a claim by a Barbadian subsidiary of U.S. energy company Anadarko against the Bolivarian Republic of Venezuela.

In the award, the tribunal of Peter Tomka (chair), L. Yves Fortier (claimant’s nominee) and Marcelo Kohen (respondent’s nominee) addressed on a preliminary basis an objection by Venezuela that the tribunal lacked jurisdiction ratione voluntatis over the claims of the claimant, Venezuela US, S.R.L.

The entire tribunal agreed with Venezuela that the BIT, in the aftermath of Venezuela’s 2012 denunciation of the ICSID Convention, appeared to offer no direct viable avenue to arbitration for the claimant.

However, for the majority of Mr. Tomka and Mr. Fortier, the treaty did express Venezuela’s basic consent to international arbitration. Therefore, the treaty’s Most Favoured Nation (MFN) clause provided a gateway into the dispute settlement mechanism of another treaty, the Ecuador-Venezuela BIT, that permitted UNCITRAL-based arbitration in any circumstance where ICSID-based arbitration was unavailable. In a dissenting opinion, Mr. Kohen parted company with this part of the majority’s analysis. We discuss their duelling views below. 

The developments come in an arbitration that Anadarko has not seemingly publicized, and about which little of substance is said in the interim award. As we discuss in more detail in a separate report, the award does reveal that the case has seen two successive arbitrator challenges: an unsuccessful challenge by Venezuela to Mr. Fortier, and a successful challenge by the claimant to Venezuela’s original nominee in the case, Gabriel Bottini.

Although the case proceeds on the basis of this interim award, it is unclear if Venezuela has raised other jurisdictional objections that await consideration.

The claimant is represented by King & Spalding. Venezuela is represented by Curtiss Mallet-Prevost.

BIT offered back-up options of Additional Facility (and, as a second back-up, UNCITRAL) arbitration, but only for the period prior to Venezuela’s becoming a full ICSID member

The Barbados-Venezuela BIT was signed in July of 1994 at a moment when Barbados and Venezuela had both signed the ICSID Convention, but Venezuela had yet to ratify the latter instrument. Venezuela subsequently ratified the ICSID Convention in 1995, prior to the BIT’s entry into force.

One notable upshot of Venezuela’s accession to the ICSID Convention was that the BIT’s “fall-back” option of Additional Facility arbitration (or, in the absence of that, UNCITRAL arbitration) was obviated.

Of particular importance, the tribunal would read the BIT’s offering of those two fall-back options as only applicable prior to the treaty-parties becoming ICSID members. In other words, the treaty-drafters had anticipated that Venezuela’s accession to ICSID was uncertain at the time the BIT was drafted, and therefore Article 8(2) prescribed fall-back options that would apply “as long as the Republic of Venezuela has not become a Contracting State of the Convention”.

Crucially, the treaty did not set forth “fall-back” options should a party later denounce the ICSID Convention (as Venezuela did in 2012, thus taking arbitration under the ICSID rules off the table.) Hence, if the claimant in this case were to access arbitration, it would need to do so via the BIT’s MFN clause, because the BIT itself did not offer a viable path to Additional Facility or UNCITRAL arbitration at the present time.

Majority sees MFN portal to jurisdiction

The majority of Mr. Tomka and Mr. Fortier first noted that Article 3(3) of the treaty, left no doubt that it applied to investor-state arbitration because it expressly reached across Articles 1 through 11 of the Barbados-Venezuela treaty. For the majority, this meant that there was no need to probe whether the “treatment” contemplated in the MFN guarantee reached to dispute settlement. The majority felt duty-bound to give effect to Article 3(3), and to take seriously its indication that it applied to Article 8 (the ISDS article) of the BIT.

In its pleadings, the claimant had argued that the tribunal needn’t go so far as to “import” jurisdiction. Contending that the BIT already contained a (very circumscribed) consent to UNCITRAL arbitration, the claimant urged the tribunal to follow the approach in the Garanti Koza v. Turkmenistan case, where that tribunal majority had posited that it had the relevant state’s consent to arbitration, and merely needed to use the MFN clause to alter the conditions applicable to that consent.

For the majority in the Anadarko case, this reasoning was persuasive. They would stress that they were not importing consent, but merely giving the investor-claimant a more favourable version of consent that was manifest in the Barbados-Venezuela BIT. In finding this consent in the base-treaty, the majority zeroed in on Article 8(4) of the BIT, which reads as follows:

“Each Contracting Party hereby gives its unconditional consent to the submission of disputes as referred to in paragraph 1 of this Article to international arbitration in accordance with the provisions of this Article.”

While the other parts of Article 8 might have circumscribed the circumstances under which each of ICSID, ICSID AF and UNCITRAL arbitration could be accessed, the majority made clear that it viewed the above-mentioned “unconditional consent” phrasing to establish a clear threshold consent to international arbitration. Thus, for the majority, the only question was the conditions under which the investor could capitalize on that consent. At this stage, the MFN guarantee could assist the investor in stepping over the “temporal” limitation applicable to UNCITRAL-based arbitration in the BIT. (Recall that the BIT had only offered UNCITRAL arbitration as a second back-up option in the limited period before Venezuela joined ICSID.)

Thanks to the MFN clause, the claimant could reach into a BIT that contained no such temporal limitation, and the tribunal keyed in on the Ecuador-Venezuela BIT – which offered UNCITRAL arbitration “if for any reason” ICSID or its additional facility were unavailable. Deeming this to be more favourable than the more limited UNCITRAL offer in the Barbados-Venezuela BIT, the majority deemed that the investor could arbitrate “on the same conditions as investors from Ecuador”.

The majority thus rejected Venezuela’s contention that the tribunal lacked jurisdiction ratione voluntatis.

Dissenter sees no consent to UNCITRAL arbitration in base treaty

In a dissenting opinion [click to download], Mr. Kohen accused the majority of doing something that the entire tribunal had explicitly disavowed: importing consent into a treaty in which there was none.

The majority had construed the aforementioned reference in Article 8(4) to Venezuela’s “unconditional consent” to arbitrate (under three specific sets of rules) as an indication that basic consent to international arbitration (albeit with certain temporal conditions) was rooted in the base-treaty.

By contrast, Mr. Kohen construed this “unconditional consent” reference as merely an indicator of the states’ “advance consent” to arbitration ((i.e. so that a further written agreement was not needed) under terms that were otherwise spelled out in the other provisions of Article 8.

Crucially, in Mr. Kohen’s view, Article 8’s offer of UNCITRAL arbitration was not operable at all at the time that this particular dispute was brought to arbitration. Rather, Mr. Kohen stressed that proper fidelity to the totality of Article 8, showed that the treaty contained no viable consent to UNCITRAL arbitration.

Rather, the treaty had only offered access to the UNCITRAL rules under conditions which never materialized (i.e. in the period before Venezuela joined ICSID, and where the Additional Facility would not be available). Because Venezuela had ultimately acceded to the ICSID Convention before this particular BIT came into force, the offer of UNCITRAL-based arbitration as a “second best” back-up option was never needed – and, crucially, was no longer applicable at all, following ICSID’s accession to the ICSID Convention. Venezuela would later denounce the Convention, and take ICSID rules arbitration off the table, the treaty, did not offer any other option for arbitration, including UNCITRAL arbitration. This meant that Barbadian investors enjoyed no right to arbitration under the base treaty, thus meaning that the tribunal should not be capable to moving on to interpret and apply the MFN clause under such circumstances.

For Mr. Kohen, the majority nevertheless committed the sin of manufacturing consent, or, in his words, “bring(ing) back to life consent to an arbitral means that had since disappeared, and which has been been applicable”.

Moreover, as we discuss below, Mr. Kohen also doubted that the treaty’s MFN clause could reach to investor-state dispute settlement.

Notwithstanding express treaty clause applying MFN to Articles 1 through 11 of the treaty, dissenter does not see applicability to Article 8’s ISDS mechanism

Mr. Kohen acknowledged that both parties conceded that Article 3(3) express application of the MFN clause to Articles 1 through 11 meant that the clause reached Article 8’s ISDS mechanism. (The parties differed as to the scope of that application though).

For Mr. Kohen, however, arbitrators need not be bound by the interpretation of the two disputing parties. Indeed, he noted that one of the two treaty parties (Barbados) is obviously not a party to this arbitration.

Embarking on his own reading, Mr. Kohen posited that Article 3(3) did not appear to be well-drafted because some of Articles 1 through 11 were not logically susceptible to MFN treatment, including: the definitions of investment; the MFN clause itself; the exceptions to that MFN clause laid out in Article 7; and Article 9’s state to state dispute mechanism.

Thus, the mere inclusion of Article 8 in the range of Articles 1 to 11 should not suffice to conclude that the MFN clause applies to Article 8. Instead, Mr. Kohen said that the majority should have examined the content of Article 3(2) – the clause that accorded more favourable treatment to investors – to assess whether “it is really possible to apply it to the provisions of Article 8”.

As part of that exercise, arbitrators should assess – as the majority had not -whether the relevant “treatment” covers only substantive rights, or also procedural rights. Mr. Kohen noted that MFN treatment in Article 3(2) applies to investors “as regards their management, maintenance, use, enjoyment or disposal of their investments.” Mr. Kohen observed that there was nothing in this formulation that included the right to resort to international arbitration.

Furthermore, Mr. Kohen noted that the MFN treatment accorded was to apply in the state’s “territory. As per the reasoning in the Berschader v. Russia case, Mr. Kohen stressed that the MFN treatment should be seen as focused on the “material rights” accorded to investors in the host state.

Thus, notwithstanding Article 3(3)’s stipulation that the MFN protection applies to Articles 1 through 11, Mr. Kohen took this as merely the starting point. It still fell to arbitrators to judge whether each of Articles 1 through 11 contained rights that fit within the paradigm of treatment in the host state’s territory. (Mr. Kohen added that the treaty’s object and purpose did not identify investor-state arbitration as necessary to investor protection; indeed, some investment treaties offer only state-to-state arbitration or recourse to domestic fora.)

In summing up, Mr. Kohen noted that the recent 2015 Final Report of the Study Group of the International Law Commission on the Most-Favoured Nation Clause had contemplated the possibility that MFN clauses could encompass dispute settlement provisions, but that explicit language is needed in such contexts. For Mr. Kohen, Article 3(3)’s blanket application of the MFN treatment to Articles 1 through 11 did not override the fact that Article 3(2) was not explicit in including “dispute settlement” in the enumeration of investor rights governed by the MFN clause.