Lagniappe
Oliver
L Campbell: International arbitration
arises from the growth
in international Trade
International Arbitration Arises from the Growth in International
Trade
For many years, Latin America adhered to the Calvo Doctrine
and a “Calvo Clause” was included in contracts signed
with foreign investors. However, as a result of globalisation,
this has been overtaken by the current trend of adopting Bilateral
Investment Treaties (BITs) instead. Whilst the “Calvo Clause” insisted
on the resolution of disputes in local courts, BITs allow for
international arbitration.
Venezuela has signed BITs with 15 countries, although only those
with Argentina, Chile, Ecuador, Holland, Portugal, Switzerland
and the United Kingdom are as yet in force. Since Venezuela and
the USA have not signed a BIT, ExxonMobil and ConocoPhillips
cannot rely on its benefits. However, the contracts originally
signed with PDVSA contemplated the possibility of international
arbitration, and Resolution 1803 of the United Nations states, “However,
upon agreement by sovereign States and other parties concerned,
settlement of the dispute should be made through arbitration
or international adjudication.”
The BIT signed between Argentina and Venezuela is typical of
such agreements.
“ Article 6: Expropriations. 1. Neither of the contracting parties
shall take measures of nationalisation or expropriation or other
equivalent measure against investments situated in its territory
and which belong to the other party unless said measures be taken
for reasons of public utility on a non-discriminatory basis and
under due legal process. 2. The measures will be accompanied
by dispositions for the payment of prompt and adequate compensation.
The amount of said compensation shall correspond to the market
value the appropriated investment had immediately before the
expropriation or, if it were greater, before the imminent expropriation
was made public.”
“ Article 10: Resolution of controversies between the contracting
parties.
1. Controversies that arise between the contracting parties related
to the interpretation or application of the present agreement
shall, as far as possible, be resolved by diplomatic channels.
2. If a controversy between the contracting parties cannot be
settled by that means in a space of six months from the start
of the negotiations, it shall be submitted, at the request of
either of the contracting parties, to an arbitral tribunal.”
“Reasons of public utility” is not
defined but it is thought to mean the collective interest of
the State which
nationalises or expropriates the investment.
When the national football team of Venezuela plays that of Colombia,
you can bet the referee (arbiter) is neither Venezuelan nor Colombian.
This lack of confidence in the arbiter being a national of either
of the team’s countries does not just apply to games but
also to commercial relations between States and between private
companies and States. Each tries to protect its investment, and
one way which provides a degree of confidence is through a clause
of international arbitration.
This is confirmed by the way the number of BITs has escalated
at an international level. Why does the International Court of
Justice exist, and why are there so many institutes for dealing
with international arbitration? The answer is that globalisation
has created much more international trade and business relationships
between countries, and that has led to many more disputes. Several
of PDVSA’S ventures abroad allow for international arbitration,
for instance, the Ruhr Oil investment in Germany. Venezuela has
also submitted to the jurisdiction of courts in the USA and England
should litigation arise in respect of bonds issued in US dollars.
The Oil Minister, Rafael Ramirez, has insisted there be no arbitrage
clauses in the new contracts with oil companies, though that
does not override the right under Resolution 1803 of the United
Nations nor of a BIT if such exists with the other party’s
country. If the minister wishes to return to the Calvo Doctrine
of the 19th century, that is his decision but it is a retrograde
step. In the 21st century, we live in another world where the
majority of countries have accepted certain norms for settling
disputes. To ask for an international arbitration clause in contracts
is not discriminatory against Venezuela--the same companies could
ask for such a clause in contracts with the Vatican despite the
Santa See’s reputation.
A
s Venezuela invests abroad in China and elsewhere in refineries
and other assets, it is possible that it will wish to protect
its investments with an international arbitration clause. We
have already seen the problems Petrobras has had with investments
in Bolivia and Ecuador, so being a neighbour is no guarantee
disputes will not occur.
I have no reason to defend ExxonMobil as I am not on their payroll.
I just wish to emphasise they have a right to go to arbitration
if they consider PDVSA’S offer of compensation at book
value is not “appropriate” according to Resolution
1803 or is not “adequate” as expressed in a Bilateral
Investment Treaty.
It is probable ExxonMobil decided to ask the courts for a freezing
order because they saw no progress in the negotiations on compensation,
and it was one way to bring PDVSA back to the negotiating table.
Such a course of action is lamentable--it has damaged PDVSA’S
reputation at an international level at the same time it has
hurt ExxonMobil’s image as the wielder of the “big
stick.”
The Oil Minister asserts ExxonMobil have “robbed” a
certain volume of oil and that they owe the government millions
of dollars. I don’t know how this could happen since the
oil ministry checks every barrel of oil that is produced for
royalty purposes. You can be certain ExxonMobil’s lawyers
will ask for a settlement that neither party owes the other anything
upon signing the compensation agreement.
The obstacle, of course, is PDVSA’S position that they
will only pay book value as compensation. The Oil Minister argues
that all the companies that stayed on in Venezuela have agreed
to accept book value, but that is a very weak argument because
the circumstances of those which remained and those which left
are entirely different.
It is not surprising those which remained accepted to have their
arms twisted and agreed to book value. In fact, Total agreed
to less because its area of operations has been extended and
ENI, whose assets have a book value of $829 millions, has agreed
to receive $700 millions over seven years--hardly “prompt
and adequate” compensation. In exchange, it will be allowed
to participate as a partner with PDVSA in the Orinoco Belt. There
is no doubt such sweeteners are an inducement to stay and accept
book value.
The companies that stay know, from the profits they expect to
make during the remainder of the 35 year contracts, that they
will recoup their investment several times. However, those that
left will not realise such profits and that is why ExxonMobil
seek something over book value in compensation. The figure of
$5 billions has been mentioned as ExxonMobil’s target,
but that is only the opening gambit. It has also been suggested
the half of the Chalmette refinery which belongs to PDVSA could
be cede in compensation. That should be worth at least $2 billions.
In brief, in my view ExxonMobil have the right to go to international
arbitration, the freezing order was probably unnecessary except
to get PDVSA’S attention, and the latter will have to offer
an amount in excess of book value if arbitration is to be avoided.
Oliver
L Campbell, MBA, DipM, FCCA, ACMA, MCIM
was born in El Callao in 1931 where his father worked in the
gold mining industry. He spent the WWII years in
England, returning to Venezuela in 1953 to work with Shell de
Venezuela (CSV), later as Finance Coordinator at Petroleos de
Venezuela (PDVSA). In 1982 he returned to the UK with his family
and retired early in 2002. Petroleumworld does not necessarily
share these views.
Editor's
Note: For more information on Global Insigth, contact: Catarina
Feria-Walsh Global Insight, catarina.walsh@globalinsight.com.
/ www.globalinsight.com.
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Petroleumworld News 03/03/08
Copyright© 2008
Oliver L Campbell. All rights reserved.
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