Oliver L Campbell
Dispute between ExxonMobil and Venezuela
On 10 June, the International Centre for Settlement of Investment Disputes published the proceeding of the dispute between Mobil Corporation, the claimants, and the Bolivarian Republic of Venezuela, the respondent. Venezuela's representatives included Dr Bernard Mommer, Ms Hildegard Rondón, Dra Beatriz Sansó de Rodríguez, Ms Mariel Pérez and Ms Irama Mommer.
The document, sixty pages long, deals only with the Tribunal's jurisdiction which was challenged by Venezuela. I will touch on just a few salient points. The most surprising one was that "Venezuela first contends that Article 22 of the Investment Law does not provide the requisite clear and unambiguous consent to arbitration of this dispute." This was upheld by the Tribunal despite the fact that, by its very title, The Law for the Promotion and Protection of Investments (Ley de Promoción y Protección de Inversiones) one would have expected otherwise. Also, the layman reading Article 22, in Spanish or in the English translation below, would have expected arbitration to be covered. I am surprised that lawyers interpret it differently, particularly since one of the co-authors of the Investment Law, Werner Corrales, stated categorically that the intention of Article 22 was that international arbitration should be unilaterally available--but then I have always said going to litigation is a lottery.
“Disputes arising between an international investor whose country of origin has in effect with Venezuela a treaty or agreement on the promotion and protection of investments, or disputes to which are applicable the provision of the Convention Establishing the Multilateral Investment Guarantee Agency (OMGI –MIGA) or the Convention on the Settlement of Investment Disputes between States and National of other States (ICSID), shall be submitted to international arbitration according to the terms of the respective treaty or agreement , if it so provides, without prejudice to the possibility of making use, when appropriate, of the dispute resolution means provided for under the Venezuelan legislation in effect,” (the highlighting is mine).
The lesson for foreign investors in Venezuela is not to count on Article 22 of the Law for the Promotion and Protection of Investments.
The second point raised by Venezuela is that, for arbitration to proceed under a Bilateral Investment Treaty (BIT), the investment must be held directly by the company availing itself of Treaty status. This is expressed in the text as follows:
"Venezuela Holding, Mobil CN Holding and Mobil Venezolana Holdings are not 'the owners' of the direct investments in Venezuela or 'the one who actually controlled' them. Therefore they do not qualify as 'international investors' under the Investment Law. Venezuela contends that the BIT does not provide a basis for ICSID jurisdiction over the dispute. It submits that Venezuela Holdings is a 'corporation of convenience' created in anticipation of litigation against the Republic of Venezuela for the sole purpose of gaining access to ICSID jurisdiction. It concludes that 'this abuse of the corporate form and blatant treaty-shopping should not be condoned.'
Some antecedents will help the reader. From October 2004, the royalty rate for the Mobil investment was raised from 1% to 16 2/3% and later to 33%, and income tax was increased from 34% to 50%. The USA does not have a BIT with Venezuela so, belatedly in October 2005, Mobil formed a new company under the law of the Netherlands, called Venezuela Holdings which, through a chain of companies, effectively owned the Cerro Negro and La Ceiba investments in Venezuela The Tribunal ruled a company can be set up in a Treaty country to protect its investment in a subsidiary just the same as it can set up a company in a foreign country for tax reasons. Not surprisingly, it also ruled that the investment need not be a direct one since the typical BIT mentions a Contracting Party "controlled directly or indirectly."
However, the Tribunal established that setting up a holding company in a Treaty country cannot have a retroactive effect. So their jurisdiction only has effect for any dispute after 21 February 2006 for the Cerro Negro investment, and 23 November 2006 for the La Ceiba investment. This excludes the increases to royalties and income tax which occurred before those dates. Mobil has only itself to blame for this since its lawyers were remiss in not setting the Netherlands company years before in anticipation of possible disputes-- they knew the USA did not have a BIT with Venezuela. They may have they relied on Article 22, but a belt and braces (suspenders to some of my readers) approach would have been more prudent.
I know some of my colleagues disagree with me, but I believe the 1% royalty rate and the 34% income tax rate were discretionary while the projects in the Orinoco Oil Belt got off the ground. Once they started producing good returns, I can understand the government wanted its share of the additional profits by increasing both rates to those generally applicable in the Venezuelan oil industry. So I think Mobil would do better to concentrate on getting a fair value for its expropriated assets. The BIT with the Netherlands states that:
"Such compensation shall represent the market value of the investments affected immediately before the measures were taken or the impending measures became public knowledge, whichever is the earlier; it shall include interest at a normal commercial rate until the date of payment and shall, in order to be effective for the claimants, be paid and made transferable, without undue delay, to the country designated by the claimants concerned and in the currency of the country of which the claimants are nationals or in any freely convertible currency accepted by the claimants."
You win some and you lose some. Venezuela won on the non applicability of Article 22 and on the non retroactive effect of the BIT with the Netherlands. Mobil lost on both those counts but won as regards the jurisdiction of the same BIT and on the acceptability of indirect investment.
To conclude, those companies relying on Article 22 of the Venezuelan Investment Law which are not covered by a BIT should hasten to restructure so that the holding company owning the companies in Venezuela is located in a country that has a BIT with Venezuela. There are currently 28 of these.
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.
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Petroleumworld News 06/25/2010
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